1) Nico Nelson, a management trainee at a large New York-based bank, is trying to estimate the real rate of return expected by investors. He notes that the 3-month T-bill currently yields 3 percent and has decided to use the consumer price index as a proxy for expected inflation. What is the estimated real rate of interest if the CPI is currently 2 percent?

A) 5%

B) 1%

C) 3%

D) 2%

2) The inflation risk premium on a bond is 2 percent, the U.S. T-bill rate is 5 percent, the maturity risk premium on the bond is 3 percent, the default risk premium on the bond is 2 percent, and the liquidity risk premium on the bond is 1 percent. Calculate its nominal rate of return.

A) 16%

B) 13%

C) 11%

D) 9%

3) Nico invested an amount a year ago and calculated his return on investment. He found that his purchasing power had increased by 15 percent as a result of his investment. If inflation during the year was 4 percent, then Nico's ________.

A) real return on investment is more than 15 percent

B) nominal return on investment is more than 15 percent

C) nominal return on investment is less than 11 percent

D) real return on investment is equal to 4 percent

4) The future value of $100 received today and deposited at 6 percent for four years is ________.

A) $126

B) $ 79

C) $124

D) $116

5) The future value of $200 received today and deposited at 8 percent for three years is ________.

A) $248

B) $252

C) $158

D) $200