One-year government bonds yield 6.9 percent and 3-year government bonds yield 3.8 percent.

Assume that the expectations theory holds. What does the market believe the rate on 2-year

government bonds will be one year from today?

2.05%

2.45%

2.35%

2.15%

2.25%

The real risk-free rate of interest is 3 percent. Inflation is expected to be 2 percent this

coming year, jump to 3 percent next year, and increase to 4 percent the year after (Year 3).

According to the expectations theory, what should be the interest rate on 2-year, risk-free

securities today?

5.80%

5.90%

5.70%

5.50%

5.60%

Currently, 3-year Treasury securities yield 9%, 7-year Treasury securities yield

9.3%, and 10-year Treasury securities yield 9.5%. If the expectations theory is

correct, what does the market expect will be the yield on 3-year Treasury

securities seven years from today?

9,32%

9.97%

10.17%

9.77%

9.57%

Keys Corporation's 5-year bonds yield 6.9%, and 5-year T-bonds yield 5.4%.

The real risk-free rate is r* = 2.2%, the inflation premium for 5 years bonds is

IP = 2.8%, the default risk premium for Keys' bonds is DRP = 0.43% versus

zero for T-bonds, and the maturity risk premium for all bonds is found with

the formula MRP = (t 1)*0.1%, where t = number of years to maturity. What

is the liquidity premium (LP) on Keys' bonds?

0.81%

0.89%

0.94%

1.07%

1.00%

Suppose the interest rate on a 1-year T-bond is 3.3% and that on a 3-year

T-bill is 5.2%. Assuming the pure expectations theory is correct, what is the

market's forecast for 2-year rates 1 year from now?

6.35%

6.45%

6.25%

6.15%

6.60%