Question 1

Use the following data to answer questions below
Assume the following premiums reflect current market conditions:
rS1U1P1*S1S1P0S1U1B1 S1U1B0= 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.

Accepted Answer

i = 3.15 + 2.65 + 0.2 = 6.00%

Question 2

Use the following data to answer questions below
Assume the following premiums reflect current market conditions:
rS1U1P1*S1S1P0S1U1B1 S1U1B0= 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.

Accepted Answer

i = 3.15 + 2.35 + 0.85 + 0.3 = 6.65%

Question 3

Use the following data to answer questions below
Assume the following premiums reflect current market conditions:
rS1U1P1*S1S1P0S1U1B1 S1U1B0= 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.

Accepted Answer

i = 3.15 + 2.65 + 0.85 + 0.3 + 0.2 = 7.15%

Question 4

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

Accepted Answer

A)  Real risk-free rate. 
B)  Inflation premium. 
C)  Default risk premium. 
D)  Liquidity premium. 
E)  Maturity risk premium.

Question 5

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

Accepted Answer

A)  Real risk-free rate. 
B)  Inflation premium. 
C)  Default risk premium. 
D)  Liquidity premium. 
E)  Maturity risk premium.

Question 6

The yield curve represents:

Accepted Answer

A)  The relationship between bond yields and stock returns. 
B)  The relationship between default risk and time to maturity. 
C)  The relationship between short-term and long-term interest rates. 
D)  The relationship between risk and return. 
E)  The relationship between yield and price.

Question 7

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

Accepted Answer

A)  Real risk-free rate. 
B)  Inflation premium. 
C)  Default risk premium. 
D)  Liquidity premium. 
E)  Maturity risk premium.

Question 8

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?

Accepted Answer

The answer of The current 1-year interest rate is 6.40%,...

Question 9

Use the following data to answer questions below
Assume the following premiums reflect current market conditions:
rS1U1P1*S1S1P0S1U1B1 S1U1B0= 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.

Accepted Answer

The answer of Use the following data to answer questions...

Question 10

Use the following data to answer questions below
Assume the following premiums reflect current market conditions:
rS1U1P1*S1S1P0S1U1B1 S1U1B0= 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.

Accepted Answer

The answer of Use the following data to answer questions...

Question 11

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?

Accepted Answer

A)  2.63%. 
B)  2.89%. 
C)  3.75%. 
D)  4.40%. 
E)  5.52%.

Question 12

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

Accepted Answer

A)  Real risk-free rate. 
B)  Inflation premium. 
C)  Default risk premium. 
D)  Liquidity premium. 
E)  Maturity risk premium.

Question 13

Use the following data to answer questions below
Assume the following premiums reflect current market conditions:
rS1U1P1*S1S1P0S1U1B1 S1U1B0= 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.

Accepted Answer

The answer of Use the following data to answer questions...

Question 14

Use the following data to answer questions below
Assume the following premiums reflect current market conditions:
rS1U1P1*S1S1P0S1U1B1 S1U1B0= 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.

Accepted Answer

The answer of Use the following data to answer questions...

Question 15

Use the following data to answer questions below
Assume the following premiums reflect current market conditions:
rS1U1P1*S1S1P0S1U1B1 S1U1B0= 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.

Accepted Answer

The answer of Use the following data to answer questions...

Question 16

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?

Accepted Answer

The answer of The current 1-year interest rate is 4.74%...

Question 17

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

Accepted Answer

A)  All bonds with maturities longer than one year must have maturity risk premiums. 
B)  All securities must have the real risk-free rate and an appropriate inflation premium. 
C)  US government securities do not have default risk or liquidity risk premiums. 
D)  All of the above are true. 
E)  None of the above is true.

Question 18

Use the following data to answer questions below
Assume the following premiums reflect current market conditions:
rS1U1P1*S1S1P0S1U1B1 S1U1B0= 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.

Accepted Answer

The answer of Use the following data to answer questions...

Exam 4: The Term Structure of Interest Rates

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?

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?

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?