Ch 6- intrest rates

Which of the following securities has the highest default premium? Question 2 options: 1) BBB corporate 2) A corporate 3) AA corporate 4) AAA corporate 5) U.S. Treasury

BBB corporate securities have the highest default premium of the securities listed.

A twelve-year corporate bond is yielding 4.9% per year and twelve-year Treasury bonds are yielding 4.2% per year. If the corporate bond's yield includes a 0.2% per year liquidity premium and a 0.3% per year maturity premium, what is its default premium?

Default premium = 4.9 - 4.2 - 0.2 = 0.5

A fifteen-year Treasury bond is yielding 6.7% per year, which includes a 1.3% per year maturity premium. If a fifteen-year corporate bond's yield includes a 0.6% per year liquidity premium and a 3.1% per year default premium, what is the yield on the corporate bond?

Fifteen-year corporate bond yield = 6.7 + 0.6 + 3.1 = 10.4

A five-year corporate bond is yielding 5.1% per year. If the corporate bond's yield includes a 0.3% per year liquidity premium, a 0.7% per year maturity premium, and a 1.5% per year default premium, what is the yield on a five-year Treasury bond?

Five-year Treasury bond yield = 5.1 - 0.3 - 1.5 = 3.3

The liquidity premium is 0.3% per year, the maturity premium is 0.4% per year, the real interest rate is 1.8% per year, and the default premium is 1.5% per year. If the risk-free interest rate is 4.2% per year, what is the annual inflation premium?

Inflation premium = 4.2 - 1.8 = 2.4

Twelve-year Treasury bonds are yielding 5.8% per year and a twelve-year corporate bond is yielding 7.4% per year. If the corporate bond's yield includes a 0.8% per year default premium and a 2.1% per year inflation premium, what is its liquidity premium?

Liquidity premium = 7.4 - 5.8 - 0.8 = 0.8

What is the annual interest rate for long-term corporate bonds, if the inflation premium is 2.1% per year, the real interest rate is 1.9% per year, the maturity premium is 0.3% per year, and the default premium is 2.5% per year?

Long-term corporate bond interest rate = 1.9 + 2.1 + 0.3 + 2.5 = 6.8

What is the annual interest rate for long-term corporate bonds, if the real interest rate is 2.1% per year, the inflation premium is 2.7% per year, the liquidity premium is 0.6% per year, the maturity premium is 0.8% per year, and the default premium is 3.1% per year?

Long-term corporate bond interest rate = 2.1 + 2.7 + 0.6 + 0.8 + 3.1 = 9.3

The risk-free interest rate is 5.7% per year, the liquidity premium is 0.5% per year, the maturity premium is 1.6% per year, the inflation premium is 2.6% per year, and the default premium is 1.9% per year. What is the annual real interest rate?

Real interest rate = 5.7 - 2.6 = 3.1

The inflation rate is expected to be 1.8% per year for the next two years and 2.4% per year thereafter. If the real interest rate is 1.7% per year, what is the annual yield on three-year Treasury securities?

Three-year Treasury security yield = 1.7 + (1.8 + 1.8 + 2.4)/3 = 3.7

A twenty-year corporate bond is yielding 6.4% per year. If the corporate bond's yield includes a 0.3% per year liquidity premium and a 1.2% per year default premium, what is the yield on a twenty-year Treasury bond?

Twenty-year Treasury bond yield = 6.4 - 0.3 - 1.2 = 4.9

The real interest rate is 2.1% per year. If the inflation rate is expected to be 2.0% per year for the next two years and 2.5% per year thereafter, what is the yield on two-year Treasury securities?

Two-year Treasury security yield = 2.1 + 2.0 = 4.1

An increase in the demand for funds will result in ___ interest rates. An increase in the supply of funds will result in ___ interest rates.

higher, lower

A decrease in investor's time preference for consumption likely will result in ___ interest rates. An increase in risk likely will result in ___ interest rates.

lower, higher

A decrease in production opportunities likely will result in ___ interest rates. A decrease in expected inflation likely will result in ___ interest rates.

lower, lower

If the real interest rate is 1.8% per year, the inflation premium is 3.1% per year, the liquidity premium is 0.3% per year, the maturity premium is 0.4% per year, and the default premium is 2.6% per year, what is the annual risk-free interest rate?

Risk-free interest rate = 1.8 + 3.1 = 4.9

The real interest rate compensates investors for doing what? Question 2 options: 1) Increasing consumption 2) Accepting a lower return 3) Forgoing consumption 4) Deferring consumption 5) Accepting more risk

The real interest rate compensates investors for deferring consumption.

An increase in investor's time preference for consumption likely will result in ___ interest rates. An increase in production opportunities likely will result in ___ interest rates.

higher, higher

An increase in expected inflation likely will result in ___ interest rates. A decrease in risk likely will result in ___ interest rates.

higher, lower