Suppose you observe the following interest rates from the yield curve:

2-year Treasury note: 4%

4-year Treasury note: 5%

These rates imply the interest rate, X, on the 2-year Treasury notes 2 years from now. What is X?

Select one:

a. 6%

b. 5.5%

c. 5%

d. 6.5%

Company A desires a variable-rate loan but currently has a better deal from the fixed-rate market at a rate of 13%. If Company A borrows from the variable-rate market, the cost would be LIBOR+2%. In contrast, Company B, which prefers a fixed-rate loan, has a better deal from the variable-rate market at LIBOR+3%. If Company B borrows from the fixed-rate market, the cost would be 16%. Knowing both companies needs, Bank C designed a swap deal. The deal is outlined in the following:

1) Company A obtains a fixed-rate loan at 13%.

2) Company B obtains a variable-rate loan at LIBOR+3%

3) Company A pays Bank C a variable rate of LIBOR+1% and receives a fixed rate of 13.3% from the bank.

4) Company B pays Bank C a fixed rate of 14.5% and receives a variable rate of LIBOR+2.0% from the bank.

How much is the cost saving to Company A?

Select one:

a. .5%

b. .7%

c. 1%

d. 1.3%

e. 1.5%

For the following bond,

Par value: $1,000

Coupon rate: 8% paid annually

Time to maturity: 3 years

Interest rate: 4%

What is the convexity? Also, if the interest rate increases from 4% to 5%, what is the price change due to the convexity?

Select one:

a. Convexity:10.085; price change: $.9887

b. Convexity:10.085; price change: $.5602

c. Convexity:11.125; price change: $.5602

d. Convexity:11.125; price change: $.9887

e. Convexity:12.453; price change: $.3321

The expected annual inflation rates for the coming 5 years are listed in the following table:

Year	Expected annual inflation rate
1	2%
2	3
3	4
4	4
5	4.5

If the real risk-free rate for a three-year debt security is 2%. What is the nominal risk-free rate for the security?

Select one:

a. 4%

b. 6%

c. 4.5%

d. 3.5%

e. 5%

For the following bond,

Par value: $1,000

Coupon rate: 8% paid annually

Time to maturity: 3 years

Interest rate: 4%

What is the convexity? Also, if the interest rate increases from 4% to 5%, what is the price change due to the convexity?

Select one:

a. Convexity:10.085; price change: $.9887

b. Convexity:10.085; price change: $.5602

c. Convexity:11.125; price change: $.5602

d. Convexity:11.125; price change: $.9887

e. Convexity:12.453; price change: $.3321