University of North Georgia, Dahlonega

FINC 3440

Exam 16

1)A five-year Treasury bond is yielding 4.7% per year, which includes a 1.9% per year real rate. If a five- year corporate bond’s yield includes a 0.3% per year liquidity premium and a 4.1% per year default premium, what is the yield on the corporate bond?

1)            9.1%

2)            8.8%

3)            8.2%

4)            8.6%

5)            7.9%

2. An increase in expected inflation likely will result in         interest rates. A decrease in risk likely will result in  interest rates.
   1. Higher, lower
   2. Higher, higher
   3. None of these answers
   4. Lower, lower
   5. Lower, higher

3. The real interest rate is 2.4% per year. If the inflation rate is expected to be 2% per year for the next two years and 8% per year thereafter, what is the yield on four-year Treasury securities?

1)            6.8%

2)            5.9%

3)            6.1%

4)            5.7%

5)            5.5%

4. The real interest rate is 2.2% per year, the liquidity premium is 0.4% per year, the maturity premium is 0.6% per year, and the default premium is 3.1% per year. If the risk-free interest rate is 5.3% per year, what is the annual inflation premium?

1)            3.5%

2)            3.7%

3)            3.1%

4)            3.3%

5)            2.9%

Answer: Inflation premium = 5.3 – 2.2 = 3.1

5. Nine-year Treasury bonds are yielding 4.8% per year and a nine-year corporate bond is yielding 6.3% per year. If the corporate bond’s yield includes a 0.8% per year default premium and a 1.7% per year inflation premium, what is its liquidity premium?

1)            0.7%

2)            0.8%

3)            0.9%

4)            0.5%

5)            0.6%

6. If the real interest rate is 2.1% per year, the maturity premium is 0.6% per year, the inflation premium is 2.5% per year, and the default premium is 2.7% per year, what is the annual interest rate for long-term corporate bonds?

1)            7.9%

2)            6.9%

3)            6.4%

4)            5.8%

5)            7.3%

7. Which of the following securities has the lowest default premium?
   1. U.S. Treasury
   2. BBB corporate
   3. AAA corporate
   4. AA corporate
   5. A corporate

8. A five-year corporate bond is yielding 4.1% per year. If the corporate bond’s yield includes a 0.2% per year liquidity premium, a 0.3% per year maturity premium, and a 1.1% per year default premium, what is the yield on a five-year Treasury bond?

1)            2.5%

2)            3.0%

3)            2.8%

4)            3.9%

5)            3.6%

9. The risk-free interest rate is 4.1% per year, the liquidity premium is 0.5% per year, the maturity premium is 0.7% per year, the inflation premium is 2.2% per year, and the default premium is 2.7% per year. What is the annual real interest rate?

1)            1.7%

2)            1.9%

3)            1.5%

4)            2.3%

5)            2.1%

10. Twenty-year Treasury bonds are yielding 6.8% per year and a twenty-year corporate bond is yielding 8.1% per year. If the corporate bond’s yield includes a 0.2% per year liquidity premium and a 0.4% per year maturity premium, what is its default premium?

1)            1.4%

2)            1.1%

3)            1.3%

4)            1.2%

5)            1.5%

11. What is the annual risk-free interest rate, if the real interest rate is 1.5% per year, the inflation premium is 0.8% per year, the liquidity premium is 0.3% per year, the maturity premium is 0.4% per year, and the default premium is 2.2% per year?

1)            2.1%

2)            2.3%

3)            2.9%

4)            2.7%

5)            2.5%

12. An increase in expected inflation likely will result in             interest rates. A decrease in risk likely will result in   interest rates.
    1. None of these answers
    2. Lower, higher
    3. Higher, higher
    4. Lower, lower
    5. Higher, lower

13. The inflation rate is expected to be 1.8% per year for the next two years and 2.4% per year thereafter. If the real interest rate is 1.7% per year, what is the annual yield on three-year Treasury securities?

1)            4.1%

2)            3.3%

3)            3.5%

4)            3.9%

5)            3.7%

14. The risk-free interest rate is 3.8% per year. If the liquidity premium is 0.4% per year, the maturity premium is 0.7% per year, the real interest rate is 1.9% per year, and the default premium is 1.5% per year, what is the annual inflation premium?

1)            1.6%

2)            1.7%

3)            2.1%

4)            1.9%

5)            2.0%