Question

One-year government bonds yield 6.9 percent and 3-year government bonds yield 3.8 percent. |

Assume that the expectations theory holds. What does the market believe the rate on 2-year |

government bonds will be one year from today? |

2.05%

2.45%

2.35%

2.15%

2.25%

The real risk-free rate of interest is 3 percent. Inflation is expected to be 2 percent this |

coming year, jump to 3 percent next year, and increase to 4 percent the year after (Year 3). |

According to the expectations theory, what should be the interest rate on 2-year, risk-free |

securities today? |

5.80%

5.90%

5.70%

5.50%

5.60%

Currently, 3-year Treasury securities yield 9%, 7-year Treasury securities yield |

9.3%, and 10-year Treasury securities yield 9.5%. If the expectations theory is |

correct, what does the market expect will be the yield on 3-year Treasury |

securities seven years from today? |

9,32%

9.97%

10.17%

9.77%

9.57%

Keys Corporation's 5-year bonds yield 6.9%, and 5-year T-bonds yield 5.4%. |

The real risk-free rate is r* = 2.2%, the inflation premium for 5 years bonds is |

IP = 2.8%, the default risk premium for Keys' bonds is DRP = 0.43% versus |

zero for T-bonds, and the maturity risk premium for all bonds is found with |

the formula MRP = (t – 1)*0.1%, where t = number of years to maturity. What |

is the liquidity premium (LP) on Keys' bonds? |

0.81%

0.89%

0.94%

1.07%

1.00%

Suppose the interest rate on a 1-year T-bond is 3.3% and that on a 3-year |

T-bill is 5.2%. Assuming the pure expectations theory is correct, what is the |

market's forecast for 2-year rates 1 year from now? |

6.35%

6.45%

6.25%

6.15%

6.60%

Answer #1

**Part 1:**

Given, Spot rate for 3 years S3= 3.8% and Spot rate for 1 year= 6.9%

Two year rate, one year from now= {[(1+3.8%)^3/(1+6.9%)]^1/2}-1

= [(1.118387/ 1.069)^(1/2)]-1 = [1.046199^(1/2)]-1= 2.2839% Rounded to
**2.25%**

The answer is **last
option**

**Part 2:**

Spot rate for year1 = Real rate of 3% plus Inflation 2%= 5%

Forward rate for year 2, after one year= Real rate 3% plus inflation 3%= 6%

Therefore, spot rate for 2 years now = {[(1+5%)*(1+6%)]^(1/2)}-1

=[1.113^(1/2)]-1 =
1.054988-1 = 5.4988% Rounded to
**5.5%**

The answer is **4th
option.**

**Part 3:**

Spot rate for 7 years (S7)=9.3%

Spot rate for 10 years (S10)=9.5%

Three year forward rate after 7 years= {[(1+S10)^10 / (1+S7)^7]^(1/3)}-1

={[(1+9.5%)^10 / (1+9.3%)^7]^(1/3)}-1 = [(2.47822761/1.86355036)^(1/3)]-1

=1.099681-1 = 9.9681% Rounded to
**9.97%**

The answer is **2nd
option.**

**Part 4:**

Given,

Yield on Key Corporation 5 year bond (NIR)= 6.9%

Risk free real rate for 5 years (RF)= 5%

Default Risk Premium (DRP)= 0.43%

Maturity Risk Premium (MRP)= (5-1)*0.1= 4*0.1= 0.40%

Therefore, liquidity premium= NIR-
RF-DRP-MRP = 6.9%-5%-0.43%-0.4%= **1.07%**

The answer is **4th
option.**

**Part 5:**

Given S1= 3.3%, S3= 5.2%

2 year rate 1 year from now={[(1+S3)^3 / (1+S1)]^(1/2)}-1

=={[(1+5.2%)^3 / (1+3.3%)]^(1/2)}-1
= [(1.16425261/1.033)]^(1/2)}-1= 6.1631% Rounded to
**6.15%**

Answer is **4th
option.**

EXPECTATIONS
THEORY
One-year Treasury
securities yield 3.65%. The market anticipates that 1 year from
now, 1-year Treasury securities will yield 5.55%. If the pure
expectations theory is correct, what is the yield today for 2-year
Treasury securities? Calculate the yield using a geometric average.
Do not round your intermediate calculations. Round your answer to
two decimal places.
___%
EXPECTED
INTEREST RATE
The real risk-free
rate is 2.45%. Inflation is expected to be 3.25% this year, 3.6%
next year, and 2.2%...

Question 1.)
One-year Treasury securities yield 4.55%. The market anticipates
that 1 year from now, 1-year Treasury securities will yield 5.7%.
If the pure expectations theory is correct, what is the yield today
for 2-year Treasury securities? Calculate the yield using a
geometric average. Do not round your intermediate calculations.
Round your answer to two decimal places.
Question 2.)
A Treasury bond that matures in 10 years has a yield of 5.25%. A
10-year corporate bond has a yield of...

The real risk-free rate of interest is 3.8%. Inflation
is expected to be 2.5% this year and 4.0% during the next 2 years.
. Assume that the maturity risk premium is 0.5% for 2-year and 0.8%
for 3-year period. What is the yield on 2-year Treasury securities?
What is the yield on 3-year Treasury securities?

The 5-year bonds of Cartwright Enterprises are
yielding 7.75 percent per year. Treasury bonds with the same
maturity are yielding 5.2 percent per year. The real risk-free rate
(k*) has not changed in recent years and is 2.3 percent. The
average inflation premium is 2.5 percent and the maturity risk
premium takes the form; MRP = 0.1% (t-1), where t = number of years
to maturity. If the liquidity premium is 1 percent, what is the
default risk premium on...

The
Gran Group's 5-year bonds yield 6.85%, and 5-year T-bonds yield
4.75%. The real risk-free rate is r* = 2.80%, the default risk
premium for Gran's bonds is DRP = 0.85% versus zero for T-bonds,
the liquidity premium on Gran's bonds is LP = 1.25%, and the
maturity risk premium for all bonds is found with the formula MRP =
(t ? 1) × 0.1%, where t = number of years to maturity. What is the
inflation premium (IP) on...

Suppose 10-year T-bonds have a yield of 4.90% and 10-year
corporate bonds yield 6.67%. Also, corporate bonds have a 0.32%
liquidity premium versus a zero liquidity premium for T-bonds, and
the maturity risk premium on both Treasury and corporate 10-year
bonds is 1.05%. Additionally, the real risk free rate is 0.15%.
What is the default risk premium on corporate bonds?
Group of answer choices
1.45%
1.30%
0.40%
0.95%

Chandler Co.'s 5-year bonds yield 11.00%, and 5-year T-bonds
yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation
premium for 5-year bonds is IP = 1.75%, the liquidity premium for
Chandler's bonds is LP = 0.75% versus zero for T-bonds, and the
maturity risk premium for all bonds is found with the formula MRP =
(t − 1) × 0.1%, where t = number of years to maturity. What is the
default risk premium (DRP) on Chandler's...

Due to a recession, expected inflation this year is only 3%.
However, the inflation rate in Year 2 and thereafter is expected to
be constant at some level above 3%. Assume that the expectations
theory holds and the real risk-free rate (r*) is 3.5%. If the yield
on 3-year Treasury bonds equals the 1-year yield plus 3.5%, what
inflation rate is expected after Year 1? Round your answer to two
decimal places.

Assume that inflation is expected to decline steadily in the
future, but that the real risk rate will remain constant. which of
the following statements is correct.
1. if inflation is expected to decline, there can be no maturity
risk premium
2. the expectations theory cannot hold if inflation is
decreasing
3. if the pure expectations theory holds, the corporate yield
curve must be downward sloping
4. if the pure expectations theory holds, the treasury yield
curve must be downward...

5. Suppose 10-year T-bonds have a yield of 5.30% and 10-year
corporate bonds yield 6.75%. Also, corporate bonds have a 0.25%
liquidity premium versus a zero liquidity premium for T-bonds, and
the maturity risk premium on both Treasury and corporate 10-year
bonds is 1.15%. What is the default risk premium on corporate
bonds?
A. 1.08%
B. 1.20%
C. 1.32%
D. 1.45%
E. None of the above.
6. A company has two $1,000 face value bonds outstanding bond
selling for $701.22....

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 9 minutes ago

asked 18 minutes ago

asked 20 minutes ago

asked 28 minutes ago

asked 35 minutes ago

asked 42 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago