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51.
Forecasting Interest Rates Assume the current interest rate on a one-year Treasury bond
(1
R
1) is 5.00 percent, the current rate on a two-year Treasury bond (1
R
2) is 5.75 percent, and
the current rate on a three-year Treasury bond (1
R
3) is 6.25 percent. If the unbiased
expectations theory of the term structure of interest rates is correct, what is the one-year
interest rate expected on Treasury bills during year 3, 3
f
1?
52.
Forecasting Interest Rates A recent edition of
The Wall Street Journal
reported interest
rates of 3.10 percent, 3.50 percent, 3.75 percent, and 3.95 percent for three-year, four-year,
five-year, and six-year Treasury security yields, respectively, According to the unbiased
expectation theory of the term structure of interest rates, what are the expected one-year
rates for year 6?
53.
A particular security's default risk premium is 3 percent. For all securities, the inflation risk
premium is 1.75 percent and the real interest rate is 4.2 percent. The security's liquidity risk
premium is 0.35 percent and maturity risk premium is 0.95 percent. The security has no
special covenants. Calculate the security's equilibrium rate of return.
54.
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds
have no special covenants.
The Wall Street Journal
reports that one-year T-bills are currently
earning 3.55 percent. Your broker has determined the following information about economic
activity and Moore Corporation bonds:
Real interest rate = 2.75 percent
Default risk premium = 1.05 percent
Liquidity risk premium = 0.50 percent
Maturity risk premium = 1.85 percent
What is the inflation premium?
55.
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds
have no special covenants.
The Wall Street Journal
reports that one-year T-bills are currently
earning 3.55 percent. Your broker has determined the following information about economic
activity and Moore Corporation bonds:
Real interest rate = 2.75 percent
Default risk premium = 1.05 percent
Liquidity risk premium = 0.50 percent
Maturity risk premium = 1.85 percent
What is the fair interest rate on Moore Corporation 30-year bonds?
56.
Dakota Corporation 15-year bonds have an equilibrium rate of return of 9 percent. For all
securities, the inflation risk premium is 1.95 percent and the real interest rate is 3.65 percent.
The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95
percent. The security has no special covenants. Calculate the bond's default risk premium.
57.
A two-year Treasury security currently earns 5.13 percent. Over the next two years, the real
interest rate is expected to be 2.15 percent per year and the inflation premium is expected to
be 1.75 percent per year. Calculate the maturity risk premium on the two-year Treasury
security.
58.
Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill
rates over the following three years (i.e., years 2, 3 and 4, respectively) are as follows:
1R1 = 5 percent, E(2r1) = 7 percent, E(3r1) = 7.5 percent E(4r1) = 7.85 percent
Using the unbiased expectations theory, calculate the current (long-term) rates for one-year
and two-year -maturity Treasury securities.
59.
Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill
rates over the following three years (i.e., years 2, 3 and 4 respectively) are as follows:
1R1 = 5 percent, E(2r1) = 6 percent, E(3r1) = 7.5 percent E(4r1) = 7.85 percent
Using the unbiased expectations theory, calculate the current (long-term) rates for three-
year- and four-year-maturity Treasury securities.
60.
Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill
rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:
1R1 = 5 percent, E(2r1) = 6 percent, E(3r1) = 7.5 percent E(4r1) = 6.85 percent
Using the unbiased expectations theory, calculate the current (long-term) rates for one-, two-
, three-, and four-year-maturity Treasury securities.
61.
One-year Treasury bills currently earn 3.75 percent. You expect that one year from now, one-
year Treasury bill rates will increase to 4.15 percent. If the unbiased expectations theory is
correct, what should the current rate be on two-year Treasury securities?
62.
One-year Treasury bills currently earn 4.5 percent. You expect that one year from now, one-
year Treasury bill rates will increase to 6.65 percent. The liquidity premium on two-year
securities is 0.05 percent. If the liquidity theory is correct, what should the current rate be on
two-year Treasury securities?
63.
Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity
premiums for the next four years are expected to be as follows:
R1 = 5.95 percent
E(r2) = 6.25 percent L2 = 0.05 percent
E(r3) = 6.75 percent L3 = 0.10 percent
E(r4) = 7.15 percent L4 = 0.12 percent
Using the liquidity premium hypothesis, what should be the current rate on four-year
Treasury securities?
64.
The Wall Street Journal
reports that the rate on three-year Treasury securities is 7.00
percent, and the six-year Treasury rate is 6.20 percent. From discussions with your broker,
you have determined that expected inflation premium is 2.25 percent next year, 2.50 percent
in Year 2, and 2.50 percent in Year 3 and beyond. Further, you expect that real interest rates
will be 4.4 percent annually for the foreseeable future. Calculate the maturity risk premium on
the 3-year Treasury security.
65.
The Wall Street Journal
reports that the rate on three-year Treasury securities is 6.50
percent, and the six-year Treasury rate is 6.80 percent. From discussions with your broker,
you have determined that expected inflation premium is 2.25 percent next year, 2.50 percent
in Year 2, and 2.60 percent in Year 3 and beyond. Further, you expect that real interest rates
will be 3.4 percent annually for the foreseeable future. Calculate the maturity risk premium on
the three-year and the six-year Treasury security.
66.
Nikki G's Corporation's 10-year bonds are currently yielding a return of 9.25 percent. The
expected inflation premium is 2.0 percent annually and the real interest rate is expected to be
3.10 percent annually over the next 10 years. The liquidity risk premium on Nikki G's bonds is
0.1 percent. The maturity risk premium is 0.10 percent on two-year securities and increases
by 0.05 percent for each additional year to maturity. Calculate the default risk premium on
Nikki G's 10-year bonds.
67.
Suppose we observe the following rates: 1R1 = 12 percent, 1R2 = 15 percent. If the unbiased
expectations theory of the term structure of interest rates holds, what is the one-year interest
rate expected one year from now, E(2r1)?
68.
The Wall Street Journal
reports that the rate on four-year Treasury securities is 7.50 percent
and the rate on five-year Treasury securities is 9.15 percent. According to the unbiased
expectations hypotheses, what does the market expect the one-year Treasury rate to be four
years from today, E(5r1)?
69.
The Wall Street Journal
reports that the rate on three-year Treasury securities is 7.25 percent
and the rate on four-year Treasury securities is 8.50 percent. The one-year interest rate
expected in three years is E(4r1), 4.10 percent. According to the liquidity premium hypotheses,
what is the liquidity premium on the four-year Treasury security, L4?
70.
Suppose we observe the following rates: 1R1 = 13 percent, 1R2 = 16 percent, and E(2r1) = 10
percent. If the liquidity premium theory of the term structure of interest rates holds, what is
the liquidity premium for year 2, L2?
71.
You note the following yield curve in
The Wall Street Journal.
According to the unbiased
expectations hypothesis, what is the one-year forward rate for the period beginning one year
from today, 2f1?
72.
On May 23, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year
zero-coupon Treasury security rates were as follows:
1R1 = 4.55 percent, 1R2 = 4.75 percent, 1R3 = 5.25 percent, 1R4 = 5.95 percent
Using the unbiased expectations theory, calculate the one-year forward rates on zero-coupon
Treasury bonds for years two, three, and four as of May 23, 20XX.
73.
The Wall Street Journal
reports that the current rate on 10-year Treasury bonds is 6.25
percent, on 20-year Treasury bonds is 7.95 percent, and on a 20-year corporate bond is 10.75
percent. Assume that the maturity risk premium is zero. If the default risk premium and
liquidity risk premium on a 10-year corporate bond is the same as that on the 20-year
corporate bond, calculate the current rate on a 10-year corporate bond.
74.
The Wall Street Journal
reports that the current rate on five-year Treasury bonds is 6.45
percent and on 10-year Treasury bonds is 7.75 percent. Assume that the maturity risk
premium is zero. Calculate the expected rate on a five-year Treasury bond purchased five
years from today, E(5r5).
75.
Suppose we observe the three-year Treasury security rate (1R3) to be 11 percent, the
expected one-year rate next year E(2r1) to be 4 percent, and the expected one-year rate the
following year E(3r1) to be 5 percent. If the unbiased expectations theory of the term structure
of interest rates holds, what is the one-year Treasury security rate, 1R1?
76.
Assume the current interest rate on a one-year Treasury bond (1R1) is 5.50 percent, the
current rate on a two-year Treasury bond (1R2) is 5.95 percent, and the current rate on a
three-year Treasury bond (1R3) is 8.50 percent. If the unbiased expectations theory of the
term structure of interest rates is correct, what is the one-year interest rate expected on
Treasury bills during year 3, 3f1?
77.
If the yield curve is downward sloping, what is the yield to maturity on a 30-year Treasury
bond relative to a 10-year Treasury bond?
78.
One-year Treasury bill rates in 20XX averaged 5.15 percent and inflation for the year was 7.3
percent. If investors had expected the same inflation rate as that realized, calculate the real
interest rate for 20XX according to the Fisher effect.
79.
Assume that you observe the following rates on long-term bonds:
U.S. Treasury bonds = 4.15 percent
AAA Corporate bonds = 6.2 percent
BBB Corporate bonds = 7.15 percent
The main reason for the differences in the interest rates is:
80.
Which of the following statements is correct?
81.
One-year interest rates are 3 percent. The market expects one-year rates to be 5 percent one
year from now. The market also expects one-year rates to be 7 percent two years from now.
Assume that the unbiased expectations theory holds. Which of the following is correct?
82.
Which of the following statements is correct?
83.
The Wall Street Journal
states that the yield curve for Treasuries is downward sloping and
there is no liquidity premium or maturity risk premium. Given this information, which of the
following statements is correct?
84.
Which of the following statements is correct?
85.
In 20XX, the 10-year Treasury rate was 4.5 percent while the average 10-year Aaa corporate
bond debt carried an interest rate of 6.0 percent. What is the average default risk premium on
Aaa corporate bonds?
86.
Which of the following statements is correct?
87.
All of the following are types of financial institutions EXCEPT:
88.
All of the following are benefits that financial institutions provide to our economy EXCEPT:
89.
All of the following are factors that affect nominal interest rates EXCEPT:
90.
Which of the following statements is correct?
91.
Which of the following statements is incorrect?
92.
The theory that argues that individual investors and financial institutions have specific
maturity preferences is called the:
93.
The theory that states that the yield curve reflects the market's current expectations of future
short-term rates is called the:
94.
Which of the following statements is incorrect?
95.
All of the following are secondary market transactions EXCEPT:
96.
Which of the following is NOT correct with respect to derivative securities?
97.
Which of the following is NOT correct with respect to financial institutions?
98.
All of the following are factors that influence interest rates for individual securities EXCEPT:
99.
The real interest rate is:
100.
All of the following special provisions benefit security holders EXCEPT:
101.
An example of an illiquid asset is:
102.
All of the following are common shapes for the yield curve EXCEPT:
103.
Determinants of Interest Rates for Individual Securities
The Wall Street Journal
reports
that the current rate on five-year Treasury bonds is 2.85 percent and on 10-year Treasury
bonds is 4.35 percent. Assume that the maturity risk premium is zero. Calculate the expected
rate on a five-year Treasury bond purchased five years from today, E(5
r
5).
