QUESTION 6

Part A: Which of the following is NOT true of Real Risk-Free Rates?

a. It assumes zero risk and zero uncertainty, simply reflecting differences in timing of spending

b. Higher preference to spend now will result in a higher risk-free rate.

c. The interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate for U.S.-based investors.

d. The formula of Real Risk-Free Rates(rf)= nominal risk-free rate inflation rate (inflation premium)

e. Real risk free rate is a nominal rate .

Part B: A 15-year bond with a face value of $1,000 currently sells for $1150. Which of the following statements is CORRECT?

a. The bonds coupon rate does not exceed its current yield

b. The bonds current yield exceeds its yield to maturity.

c. The bonds yield to maturity is greater than its coupon rate.

d. The bonds current yield is equal to its coupon rate.

e. If the yield to maturity stays constant until the bond matures, the bonds price will remain the same