Exam 2: The Financial Markets and Interest Rates

The date today is January 1,2010.A one-year security maturing on 1/1/11 yields 3%.A two-year security maturing on 1/1/12 yields 6%.A three-year security maturing on 1/1/13 yields 11%.Calculate the expected annual return on a two-year security beginning 1/1/11 and maturing on 1/1/13.

You are considering an investment in a U.S.Treasury bond but you are not sure what rate of interest it should pay.Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and,the default risk premium for AAA rated corporate bonds is 3.5%.What rate of interest should the U.S.Treasury bond pay?

Given the rate information in the table below,estimate the nominal rate for a AA-rated corporate bond.Assume a liquidity premium of 8 basis points.Identify as part of your answer the inflation risk premium,the default risk premium,the maturity premium,and the liquidity premium.

Preferred stock is traded in the money market,while common stock is traded in the capital market.

The provisions of the Sarbanes-Oxley Act of 2002,or SOX,apply to all U.S.-based corporations,as well as to foreign corporations conducting business in U.S.markets.

Given the anticipated rate of inflation (i)of 1.7% and the real rate of interest (R)of 1.4%,find the nominal rate of interest (r).

Common stock is considered a short-term security because it has no maturity date and a long-term security is one with a maturity date of more than one year.

Activities of the investment banker include