Exam 4: The Term Structure of Interest Rates

Use the following data to answer questions below Assume the following premiums reflect current market conditions: r^* = 3.15%; IP (1-year bonds) = 2.35%; IP (3-year bonds) = 2.65%; IP (5-year bonds) = 2.90%; DRP (AAA corporate bonds) = 0.60%; DRP (AA+ corporate bonds) = 0.85%; LP (AAA corporate bonds) = 0.22%; LP (AA+ corporate bonds) = 0.30%; MRP = 0.1% × (t − 1) where t is the number of years to maturity. -Calculate the interest rate for a 3-year Treasury security.

Use the following data to answer questions below Assume the following premiums reflect current market conditions: r^* = 3.15%; IP (1-year bonds) = 2.35%; IP (3-year bonds) = 2.65%; IP (5-year bonds) = 2.90%; DRP (AAA corporate bonds) = 0.60%; DRP (AA+ corporate bonds) = 0.85%; LP (AAA corporate bonds) = 0.22%; LP (AA+ corporate bonds) = 0.30%; MRP = 0.1% × (t − 1) where t is the number of years to maturity. -Calculate the interest rate for a 1-year AA+ corporate bond.

Use the following data to answer questions below Assume the following premiums reflect current market conditions: r^* = 3.15%; IP (1-year bonds) = 2.35%; IP (3-year bonds) = 2.65%; IP (5-year bonds) = 2.90%; DRP (AAA corporate bonds) = 0.60%; DRP (AA+ corporate bonds) = 0.85%; LP (AAA corporate bonds) = 0.22%; LP (AA+ corporate bonds) = 0.30%; MRP = 0.1% × (t − 1) where t is the number of years to maturity. -Calculate the interest rate for a 3-year AA+ corporate bond.

Which of the following items reflects the expected changes in purchasing power over the life of the security in question?

Which of the following items reflects the size of the market for the security in question?

The yield curve represents:

Which of the following items reflects the time value of money?

The current 1-year interest rate is 6.40%, while the current 2-year interest rate is 5.80%. Given these rates, what is the expected 1-year interest rate one year from now?

Use the following data to answer questions below Assume the following premiums reflect current market conditions: r^* = 3.15%; IP (1-year bonds) = 2.35%; IP (3-year bonds) = 2.65%; IP (5-year bonds) = 2.90%; DRP (AAA corporate bonds) = 0.60%; DRP (AA+ corporate bonds) = 0.85%; LP (AAA corporate bonds) = 0.22%; LP (AA+ corporate bonds) = 0.30%; MRP = 0.1% × (t − 1) where t is the number of years to maturity. -Calculate the interest rate for a 1-year Treasury security.

Use the following data to answer questions below Assume the following premiums reflect current market conditions: r^* = 3.15%; IP (1-year bonds) = 2.35%; IP (3-year bonds) = 2.65%; IP (5-year bonds) = 2.90%; DRP (AAA corporate bonds) = 0.60%; DRP (AA+ corporate bonds) = 0.85%; LP (AAA corporate bonds) = 0.22%; LP (AA+ corporate bonds) = 0.30%; MRP = 0.1% × (t − 1) where t is the number of years to maturity. -Calculate the interest rate for a 3-year AAA corporate bond.

If the real risk-free rate is 112 basis points, the maturity risk premium is 177 basis points and the one-year inflation premium is 263 basis points, what is the nominal risk-free rate?

Which of the following items reflects the financial stability of the company that issued the security in question?

Use the following data to answer questions below Assume the following premiums reflect current market conditions: r^* = 3.15%; IP (1-year bonds) = 2.35%; IP (3-year bonds) = 2.65%; IP (5-year bonds) = 2.90%; DRP (AAA corporate bonds) = 0.60%; DRP (AA+ corporate bonds) = 0.85%; LP (AAA corporate bonds) = 0.22%; LP (AA+ corporate bonds) = 0.30%; MRP = 0.1% × (t − 1) where t is the number of years to maturity. -Calculate the interest rate for a 5-year AA+ corporate bond.

Use the following data to answer questions below Assume the following premiums reflect current market conditions: r^* = 3.15%; IP (1-year bonds) = 2.35%; IP (3-year bonds) = 2.65%; IP (5-year bonds) = 2.90%; DRP (AAA corporate bonds) = 0.60%; DRP (AA+ corporate bonds) = 0.85%; LP (AAA corporate bonds) = 0.22%; LP (AA+ corporate bonds) = 0.30%; MRP = 0.1% × (t − 1) where t is the number of years to maturity. -Calculate the interest rate for a 1-year AAA corporate bond.

Use the following data to answer questions below Assume the following premiums reflect current market conditions: r^* = 3.15%; IP (1-year bonds) = 2.35%; IP (3-year bonds) = 2.65%; IP (5-year bonds) = 2.90%; DRP (AAA corporate bonds) = 0.60%; DRP (AA+ corporate bonds) = 0.85%; LP (AAA corporate bonds) = 0.22%; LP (AA+ corporate bonds) = 0.30%; MRP = 0.1% × (t − 1) where t is the number of years to maturity. -Calculate the interest rate for a 5-year AAA corporate bond.

The current 1-year interest rate is 4.74% and the expected 1-year interest rate one year from now is 5.12%. If the current 3-year interest rate is 5.22%, what is the expected 1-year rate two years from now?

Which of the following rules regarding interest rate premiums are true?

Use the following data to answer questions below Assume the following premiums reflect current market conditions: r^* = 3.15%; IP (1-year bonds) = 2.35%; IP (3-year bonds) = 2.65%; IP (5-year bonds) = 2.90%; DRP (AAA corporate bonds) = 0.60%; DRP (AA+ corporate bonds) = 0.85%; LP (AAA corporate bonds) = 0.22%; LP (AA+ corporate bonds) = 0.30%; MRP = 0.1% × (t − 1) where t is the number of years to maturity. -Calculate the interest rate for a 5-year Treasury security.