Answer all of these questions with the right question number next to the correct choice. ANSWER ALL OR NONE

7)Given the yield curve below and a forecasted MRPn = 0.25 (n - 1)%, what is the expected 1-year rate forecast by the liquidity theory in the fourth year (3 years from now at time t + 3)? The spot yield curve rates are k(1, t) = 4.75% k(2, t) = 4.95% k(3, t) = 5.25% k(4, t) = 5.35% k(5, t) = 5.45%

A)4.75%

B)8.05%

C)4.95%

D)4.15%

8)What is the meaning of a "forward rate"?

A)It is a rate on a 1-year T-Bill that can be calculated today from the yield curve rates as a forecast of the 1-year T-Bill rate in the future.

B)It is a rate that arises in the forward market for Treasuries

C)It is an average of the Treasury rates that can be calculated from the yield curve rates

D)It is a rate on a 1-year T-Bill that explicity appears today in the market regarding the 1-year T-Bill rate in the future

9)The real interest rate is estimated to be 3%, and inflation is forecast as 1%, 1.5%, and 2% for each of the coming 3 years. Calculate the expected yield on a 3-year Treasury note, assuming that its maturity risk premium is negligible.

A)0%

B)4.5%

C)0.045%

D)7.5%

14)As a representative from Deutsche Bank to the Treasury option, you expect the real interest rate to be 0.56% and inflation to be constant for the next five years at 1.76%. You are also a believer in the Liquidity Theory so you assume an MRPn =.075*(n-1). What is the 4-year Treasury rate you expect?

!5)As Morgan-ChaseMorgan Stanleys representative to the Treasury bill and bond auction, you and your staff arrive at the following forecasts: Real interest rate (k*) = 0.93% Expected inflation in years 1 through 3 (I₁ to I₃) = 0.98% Expected inflation in years 4 through 7 (I₄ to I₇) = 1.21%. MRP(n) = 0% so the assumptions of the Expectation Theory hold. Given the data above, calculate Morgan Stanleys expected rate of return on a 1-year T-bill in the 7 year (time t + 7-1).