1. If you expect inflation to be 2%, 4% and 3% over the next three years, you would expect the inflation premium to be

Select one:

a. 3%

b. 9%

c. 4.5%

d. 2%

A short term treasury bill has a rate of return of 4%. If the expected rate of inflation is 1% over this period then the real risk free rate of return must be

Select one:

a. 3%

b. 4%

c. 5%

d. 2%

If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?

Select one:

a. The yield on a 10-year bond would be less than that on a 1-year bill.

b. The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium.

c. It is impossible to tell without knowing the coupon rates of the bonds.

d. The yields on the two securities would be equal.

e. It is impossible to tell without knowing the relative risks of the two securities.

The increased change in the price of longer term bonds in response to interest rate movements when compared to short term bonds is reflected in the

Select one:

a. pure interest rate

b. default risk premium

c. liquidity risk premium

d. maturity risk premium

Which of the following risk premiums apply to both corporate securities and federal government securities?

Select one:

a. default risk only

b. liquidity risk only

c. maturity risk only

d. both default risk and liquidity risk

e. both liquidity risk and maturity risk

The following yields on 20-year bonds were quoted recently

The bond of a very strong company (AAA rating) 8%

The bond of a moderately strong company(A) 10%

The bond of a relatively weak company (C) 15%

The difference in yields is due primarily to

Select one:

a. maturity risk premium

b. default risk premium

c. seniority risk premium

d. financial risk premium

The term structure of interest rates or yield curve is the pattern of interest rate yields for debt securities that are similar in all respects except for differences in

Select one:

a. tax status

b. liquidity

c. risk of default

d. term or maturity

The yield on a certain 20-year corporate bond is 14%. The yield on 90-day treasury bills is 8% while 20-year treasury securities are yielding 12%. What is the default risk premium on the corporate bond?

Select one:

a. 0%

b. 1%

c. 2%

d. 3%

e. 4%

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