Exam 6: Understanding Financial Markets and Institutions

One-year interest rates are 3 percent. The market expects one-year rates to be 5 percent one year from now. The market also expects one-year rates to be 7 percent two years from now. Assume that the unbiased expectations theory holds. Which of the following is correct?

All of the following are common shapes for the yield curve EXCEPT:

Which of these money market instruments are short-term funds transferred between financial institutions, usually for no more than one day?

Which of these capital market instruments are long-term loans to individuals or businesses to purchase homes, pieces of land, or other real property?

The Wall Street Journal reports that the rate on four-year Treasury securities is 4.75 percent and the rate on five-year Treasury securities is 5.95 percent. According to the unbiased expectations hypotheses, what does the market expect the one-year Treasury rate to be four years from today, E(₅r₁)?

The Wall Street Journal reports that the rate on three-year Treasury securities is 6.25 percent and the rate on five-year Treasury securities is 6.45 percent. According to the unbiased expectations hypotheses, what does the market expect the two-year Treasury rate to be three years from today, E(₄r₂)?

Determinants of Interest Rates for Individual Securities The Wall Street Journal reports that the current rate on five-year Treasury bonds is 2.85 percent and on 10-year Treasury bonds is 4.35 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a five-year Treasury bond purchased five years from today, E(₅r₅).

Which of the following theories argues that individual investors and financial institutions have specific maturity preferences, and to encourage buyers to hold securities with maturities other than their most preferred requires a higher interest rate?

Assume the current interest rate on a one-year Treasury bond (₁R₁) is 5.50 percent, the current rate on a two-year Treasury bond (₁R₂) is 5.95 percent, and the current rate on a three-year Treasury bond (₁R₃) is 8.50 percent. If the unbiased expectations theory of the term structure of interest rates is correct, what is the one-year interest rate expected on Treasury bills during year 3, ₃f₁?

One-year Treasury bills currently earn 3.25 percent. You expected that one year from now, one-year Treasury bill rates will increase to 3.45 percent and that two years from now, one-year Treasury bill rates will increase to 3.95 percent. The liquidity premium on two-year securities is 0.05 percent and on three-year securities is 0.15 percent. If the liquidity theory is correct, what should the current rate be on three-year Treasury securities?

One-year Treasury bills currently earn 5.50 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.75 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?

Which of the following statements is correct?

Which of these is the interest rate that would exist on a default-free security if no inflation were expected?

Determinants of Interest Rates for Individual Securities The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 3.25 percent and on 20-year Treasury bonds is 5.50 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 10-year Treasury bond purchased ten years from today, E(₁₀r₁₀).

The Wall Street Journal reports that the rate on four-year Treasury securities is 7.50 percent and the rate on five-year Treasury securities is 9.15 percent. According to the unbiased expectations hypotheses, what does the market expect the one-year Treasury rate to be four years from today, E(₅r₁)?

A two-year Treasury security currently earns 5.13 percent. Over the next two years, the real interest rate is expected to be 2.15 percent per year and the inflation premium is expected to be 1.75 percent per year. Calculate the maturity risk premium on the two-year Treasury security.

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

A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is 2 percent and the real interest rate is 2.25 percent. The security's liquidity risk premium is 0.75 percent and maturity risk premium is 0.90 percent.The security has no special covenants. What is the security's equilibrium rate of return?

Which of the following is NOT correct with respect to financial institutions?

Which of the following is NOT correct with respect to derivative securities?