FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 6: Understanding Financial Markets and Institutions

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 51

Multiple Choice

Review LaterAdd Note

Review Later

According to this theory of term structure of interest rates, at any given point in time, the yield curve reflects the market's current expectations of future short-term rates.

A) Expectations theory
B) Future short-term rates theory
C) Term structure of interest rates theory
D) Unbiased expectations theory

E) A) and B)
F) A) and C)

Correct Answer

verified

Show Answer

Question 52

Multiple Choice

Review LaterAdd Note

Review Later

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 theory, what should be the current rate on four-year Treasury securities?

A) 6.59 percent
B) 6.75 percent
C) 6.82 percent
D) 7.13 percent

E) B) and C)
F) A) and B)

Correct Answer

verified

Show Answer

Question 53

Multiple Choice

Review LaterAdd Note

The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 6.50 percent and on 10-year Treasury bonds is 6.75 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 5-year Treasury bond purchased five years from today, E(₅r₁) .

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: $\begin{array} { l l } R _ { 1 } = 6.65 \% & \\E \left( r _ { 2 } \right) = 7.75 \% & L _ { 2 } = 0.10 \% \\E \left( r _ { 3 } \right) = 7.85 \% & L _ { 3 } = 0.20 \% \\E \left( r _ { 4 } \right) = 8.15 \% & L _ { 4 } = 0.25 \%\end{array}$ Using the liquidity premium theory, what is the current rate on a four-year Treasury security?

The Wall Street Journal reports that the rate on three-year Treasury securities is 4.75 percent and the rate on four-year Treasury securities is 5.00 percent. The one-year interest rate expected in three years is E(₄r₁) , 5.25 percent. According to the liquidity premium theory, what is the liquidity premium on the four-year Treasury security, L₄?

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?

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.

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?

You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that one-year T-bills are currently earning 3.50 percent. Your broker has determined the following information about economic activity and the corporation bonds: Real interest rate = 2.50 percent Default risk premium = 1.75 percent Liquidity risk premium = 0.70 percent Maturity risk premium = 1.50 percent What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?

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.

All of the following are secondary market transactions EXCEPT:

One-year Treasury bills currently earn 5.50 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.75 percent. The liquidity premium on two-year securities is 0.075 percent. If the liquidity theory is correct, what should the current rate be on two-year Treasury securities?

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.

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?

Assume the current interest rate on a one-year Treasury bond (₁R₁) is 5.00 percent, the current rate on a two-year Treasury bond (₁R₂) is 5.75 percent, and the current rate on a three-year Treasury bond (₁R₃) 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, ₃f₁?

Which of the following statements is incorrect?

Which of these markets trade currencies for immediate or for some future stated delivery?

One-year Treasury bills currently earn 2.95 percent. You expected that one year from now, one-year Treasury bill rates will increase to 3.15 percent and that two years from now, one-year Treasury bill rates will increase to 3.35 percent. The liquidity premium on two-year securities is 0.05 percent and on three-year securities is 0.15 percent. If the liquidity theory is correct, what should the current rate be on three-year Treasury securities?

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: ${ } _ { 1 } R _ { 1 } = 5.25 \% , \quad { } _ { 1 } R _ { 2 } = 5.75 \% , \quad { } _ { 1 } R _ { 3 } = 6.25 \% , \quad { } _ { 1 } R _ { 4 } = 6.45 \%$ Using the unbiased expectations theory, what is the one-year forward rate on zero-coupon Treasury bonds for year 4 as of May 23, 20XX?

In the United States, which of these financial institutions arrange most primary market transactions for businesses?