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Assume that the following relationship holds in the bond market: (1+R(0,3))=(1+R(0,1)+L)(1+E[R(1,2)]+L)(1+E[R(2,3)]+L) If investors are risk neutral, can you think of a way that could make this relationship valid?

options:

All the risk premiums L should be positive

All the risk premiums L should be zero

Investors are indifferent to risk so premiums L can take any value.

Investors are indifferent to risk so it is not possible for this relationship to hold under any circumstance.

Assume that the following relationship holds in the bond market: (1+R(0,3))=(1+R(0,1)+L)(1+E[R(1,2)]+L)(1+E[R(2,3)]+L) If investors are risk averse, which of the following is true?

Question 5 options:

	All the risk premiums must be zero.
	If investors are risk averse, they will not want to hold a risky risk bond
	At least some risk premium L must be positive
	Investors only care about risk and thus the risk premiums L can be any value, either positive or negetive

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Which of the following statements reflects the correlation stylized facts presented in the lecture notes?

Question 2 options:

	Interest rates for different maturities are neither perfectly correlated nor perfectly uncorrelated. Correlation increases with maturity.
	Interest rates for different maturities are neither perfectly correlated nor perfectly uncorrelated. Correlation increases when maturities are further apart.
	Interst rates for different maturities are perfectly uncorrelated. This is why in the typical correlation table correlations are not all zeros or ones.
	Interst rates for different maturities are neither perfectly correlated nor perfectly uncorrelated. Correlation decreases when maturities are furhter apart.

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