Exam 6: Understanding Financial Markets and Institutions

A corporation's 10-year bonds have an equilibrium rate of return of 7 percent. For all securities, the inflation risk premium is 1.50 percent and the real interest rate is 3.0 percent. The security's liquidity risk premium is 0.15 percent and maturity risk premium is 0.70 percent. The security has no special covenants. What is the bond's default risk premium?

You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that one-year T-bills are currently earning 3.55 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real interest rate = 2.75 percent Default risk premium = 1.05 percent Liquidity risk premium = 0.50 percent Maturity risk premium = 1.85 percent What is the fair interest rate on Moore Corporation 30-year bonds?

Which of these is a comparison of market yields on securities, assuming all characteristics except maturity are the same?

One-year Treasury bills currently earn 3.15 percent. You expected that one year from now, 1-year Treasury bill rates will increase to 3.65 percent and that two years from now, one-year Treasury bill rates will increase to 4.05 percent. If the unbiased expectations theory is correct, what should the current rate be on three-year Treasury securities?

Which of these formalizes an agreement between two parties to exchange a standard quantity of an asset at a predetermined price on a specified date in the future?

Suppose we observe the following rates: ₁R₁ = 13 percent, ₁R₂ = 16 percent, and E(₂r₁) = 10 percent. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L₂?

Once firms issue financial instruments in primary markets, these same stocks and bonds are then traded in which of these?

How is the shadow banking system the same as the traditional banking system?

Which of these is NOT a participant in the shadow banking system?

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? Maturity Yield One day 3.00\% One year 5.00 Two years 6.25 Three years 8.00

An example of an illiquid asset is:

Which of the following is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments?

A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 4.2 percent. The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. The security has no special covenants. Calculate the security's equilibrium rate of return.

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: ${ } _ { 1 } R _ { 1 } = 5 \% , \quad E \left( { } _ { 2 } r _ { 1 } \right) = 5.5 \% , \quad E \left( { } _ { 3 } r _ { 1 } \right) = 6.5 \% \quad E \left( { } _ { 4 } r _ { 1 } \right) = 7.0 \%$ Using the unbiased expectations theory, what is the current (long-term) rate for four-year-maturity Treasury securities?

All of the following are types of financial institutions EXCEPT:

Which of the following is NOT a capital market instrument?

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

The theory that argues that individual investors and financial institutions have specific maturity preferences is called the:

Suppose we observe the following rates: ₁R₁ = 6 percent, ₁R₂ = 7.5 percent. 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)?

A corporation's 10-year bonds are currently yielding a return of 7.75 percent. The expected inflation premium is 3.0 percent annually and the real interest rate is expected to be 3.00 percent annually over the next 10 years. The liquidity risk premium on the corporation's bonds is 0.50 percent. The maturity risk premium is 0.25 percent on two-year securities and increases by 0.10 percent for each additional year to maturity. What is the default risk premium on the corporation's 10-year bonds?