Question

The yield on a 10 year Treasury bond is 3.76. Inflation is anticipated to be 2.4% this year. You wish to earn an 11.50% required rate of return. What is the highest risk premium you would accept?

If there was a market-wide perception of a coming slowdown in the U.S. economy relative to other economies, therefore the supply of loanable funds would ___________________ and equilibrium interest rates would ______________.

a. Shift to the left or up; increase

b. Shift to the right or down; increase.

c. Shift to the left or up; decrease.

d. Shift to the right or down; decrease

Answer 1

Yield on Treasury = 3.76%

Inflation = 2.4%

Required return = 11.5%

Required return = yield on treasury + inflation + risk premium

So

Risk premium = Required return - yield on treasury - inflation

Risk premium = 11.5 - 3.76 - 2.4 = 5.34%

Answer is A

Slowdown in economy means that interest rate in the market are going to increase. Increase in rate with decrease the supply of the loanable funds

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