Question 1

1. The real risk-free rate is expected to remain constant at 3% in the future, a 2% rate of inflation is expected for the next 2 years, after which inflation is expected to increase to 4%, and there is a positive maturity risk premium that increases with years to maturity. Given these conditions, which of the following statements is CORRECT?

   Answer

   		The yield on a 2-year T-bond must exceed that on a 5-year T-bond.
   		The yield on a 5-year Treasury bond must exceed that on a 2-year Treasury bond.
   		The yield on a 7-year Treasury bond must exceed that of a 5-year corporate bond.
   		The conditions in the problem cannot all be true--they are internally inconsistent.
   		The Treasury yield curve under the stated conditions would be humped rather than have a consistent positive or negative slope.

Question 2

1. If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 7.4%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

   Answer

   		0.67%
   		0.80%
   		0.69%
   		0.70%
   		0.66%

Question 3

1. 10 year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is CORRECT?

   Answer

   The bond