Exam 6: Understanding Financial Markets and Institutions

The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.25% and the rate on 4-year Treasury securities is 8.50%. The one-year interest rate expected in three years is E(₄r₁), 4.10%. According to the liquidity premium hypotheses, what is the liquidity premium on the 4-year Treasury security, L₄?

Unbiased Expectations Theory Suppose we observe the following rates: ₁R₁ = 6%, ₁R₂ = 7.5%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(₂r₁)?

These money market instruments are short-term funds transferred between financial institutions, usually for no more than one day.

Which of the following is NOT a money market instrument?

Forecasting Interest Rates You note the following yield curve in The Wall Street Journal. According to the unbiased expectations hypothesis, what is the one-year forward rate for the period beginning one year from today, ₂f₁?

The real interest rate is _______________________.

All of the following are common shapes for the yield curve except ____________.

Suppose we observe the three-year Treasury security rate (₁R₃) to be 11%, the expected one-year rate next year E(₂r₁) to be 4%, and the expected one-year rate the following year E(₃r₁) to be 5%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year Treasury security rate, ₁R₁?

Nikki G's Corporation's 10-year bonds are currently yielding a return of 9.25%. The expected inflation premium is 2.0% annually and the real interest rate is expected to be 3.10% annually over the next 10 years. The liquidity risk premium on Nikki G's bonds is 0.1%. The maturity risk premium is 0.10% on 2-year securities and increases by 0.05% for each additional year to maturity. Calculate the default risk premium on Nikki G's 10-year bonds.

These provide a forum in which demanders of funds raise funds by issuing new financial instruments, such as stocks and bonds.

On May 23, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows: ₁R₁ = 4.55%, ₁R₂ = 4.75%, ₁R₃ = 5.25%, ₁R₄ = 5.95% Using the unbiased expectations theory, calculate the one-year forward rates on zero-coupon Treasury bonds for years two, three, and four as of May 23, 20XX.

This is the expected or "implied" rate on a short-term security that will originate at some point in the future.

What shape does the term structure usually take? Why?

Which of the following statements is correct?

Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows: ₁R₁ = 5%, E(₂r₁) = 6%, E(₃r₁) = 7.5% E(₄r₁) = 6.85% Using the unbiased expectations theory, calculate the current (long-term) rates for one-, two-, three-, and four-year-maturity Treasury securities.

Liquidity Premium Hypothesis Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: Using the liquidity premium hypothesis, what is the current rate on a four-year Treasury security?

Which of the following statements is incorrect?

Which of the following statements is correct?

All of the following special provisions benefit security holders except ____________.

Interest rates The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 6.50 percent and on 10-year Treasury bonds is 6.75 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 5-year Treasury bond purchased five years from today, E(₅r₁₎.