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| The real-risk-free rate is 2%. Inflation is expected to be 3% this year and 1% during the next 2 years. Assume the maturity risk premium is 0. What is the yield on 3-year Treasury securities? |
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| A Treasury bond that matures in 10 years has a yield of 7%. A 10-year corporate bond has a yield of 12%. Assume the liquidity risk premium on the corporate bond is 1%. What is the default risk premium on the corporate bond? |
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| The real-risk-free rate is 3%. Inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.2%. What is the maturity risk premium for the 2-year Treasury security? |
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| The real risk-free rate is 3%, inflation is expected to be 2% this year, and the maturity risk premium is zero. |
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Which of the following would be most likely to lead to a higher level of interest rates in the economy?
a. Households start saving a larger percentage of their income.
b. Corporations step up their expansion plans and thus increase their demand for capital.
c. The level of inflation begins to decline.
d. The economy moves from a boom to a recession.
e. The Federal Reserve decides to try to stimulate the economy. |
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Definition
| b. Corporations step up their expansion plans and thus increase their demand for capital. |
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Which of the following statements is correct?
a. The yield on a 3-year Treasury bond cannot exceed the yield on a 10-year Treasury bond.
b. The real risk-free rate is higher for corporate than Treasury bonds.
c. Most evidence suggests that the maturity risk premium is zero.
d. Liquidity premiums are higher for Treasury than corporate bonds.
e. The pure expectations theory states that the maturity risk premium for long-term Treasury bonds is zero and that differences in interest rates across different maturities are driven by expectations about future interest rates. |
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Definition
| e. The pure expectations theory states that the maturity risk premium for long-term Treasury bonds is zero and that differences in interest rates across different maturities are driven by expectations about future interest rates. |
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Which of the following statements is correct?
a. The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond.
b. The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond.
c. The yield on a 3-year Treasury bond should always exceed the yield on a 2-year Treasury bond.
d. If inflation is expected to increase, then the yield on a 2-year bond will exceed that on a 3-year bond.
e. The real risk-free rate increases if people expect inflation to increase. |
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| a. The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond. |
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| One-year Treasury bills yield 6%, while 2-year Treasury notes yield 6.7%. If the expectations theory holds, what is the market’s forecast of what 1-year T-bills will be yielding one year from now? |
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| One-year Treasury securities yield 5%, 2-year Treasury securities yield 5.5%, and 3-year Treasury securities yield 6%. Assume that the expectations theory holds. What does the market expect will be the yield on 1-year Treasury securities two years from now? |
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| Suppose that the annual expected rates of inflation over each of the next five years are 5%, 6%, 9%, 13%, and 12%, respectively. What is the average expected inflation rate over the 5-year period? |
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| The real risk-free rate, r*, is 3%. Inflation is expected to average 2% a year for the next three years, after which time inflation is expected to average 3.5% a year. Assume that there is no maturity risk premium. A 7-year corporate bond has a yield of 7.6%. Assume that the liquidity premium on the corporate bond is 0.4%. What is the default risk premium on the corporate bond? |
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