fin 3403 ch 6 hw bliss fsu

Kelly Inc's 5-year bonds yield 7.50% and 5-year T-bonds yield 4.70%. The real risk-free rate is r* = 2.5%, the default risk premium for Kelly's bonds is DRP = 0.40%, the liquidity premium on Kelly's bonds is LP = 2.4% versus zero on T-bonds, and the inflation premium (IP) is 1.5%. What is the maturity risk premium (MRP) on all 5-year bonds? 0.73% 0.57% 0.74% 0.55% 0.70%

.70% r(corp) = rf + ip + Ip + drp + mrp 7.50% = 2.5% + 1.5% + 2.4% + .40% + MRP

Suppose the yield on a 10-year T-bond is currently 5.05% and that on a 10-year Treasury Inflation Protected Security (TIPS) is 3.00%. Suppose further that the MRP on a 10-year T-bond is 0.90%, that no MRP is required on a TIPS, and that no liquidity premium is required on any T-bond. Given this information, what is the expected rate of inflation over the next 10 years? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. 1.25% 1.08% 0.95% 0.94% 1.15%

1.15% Inflation = Rt - r* - MRP inflation = 5.05% - 3% - .90%

Suppose the real risk-free rate is 3.25%, the average future inflation rate is 4.35%, and a maturity risk premium of 0.07% per year to maturity applies to both corporate and T-bonds, i.e., MRP = 0.07%(t), where t is the number of years to maturity. Suppose also that a liquidity premium of 0.50% and a default risk premium of 1.20% apply to A-rated corporate bonds but not to T-bonds. How much higher would the rate of return be on a 10-year A-rated corporate bond than on a 5-year Treasury bond? Here we assume that the pure expectations theory is NOT valid. Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. 2.28% 1.89% 2.07% 1.72% ​ 2.05%

2.05% a bond =r* + IP + MRP + DRP + LP d = 3.25% + 4.35% + .07%(10) + 1.20% + .50% =10% t bond = r* + IP + MRP d = 3.25% + 4.35% + .07%(5) =7.95% 10-7.95 = 2.05

Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 2.80%. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. 6.25% 4.82% 5.35% 6.15% 5.30%

5.30% Return rate = Inflation rate + Real risk free rate 2.50% + 2.80% = 5.30% https://brainly.com/question/13680819

Kern Corporation's 5-year bonds yield 6.60% and 5-year T-bonds yield 3.40%. The real risk-free rate is r* = 2.5%, the default risk premium for Kern's bonds is DRP = 1.90% versus zero for T-bonds, the liquidity premium on Kern's bonds is LP = 1.3%, 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 inflation premium (IP) on all 5-year bonds? 0.48% 0.54% 0.51% 0.50% 0.38%

= .50% r(corp) = rf + ip + Ip + drp + mrp so 6.60% = 2.5% + IP + 1.3% + 1.90% + ((5-1)*.1%)

Kay Corporation's 5-year bonds yield 7.50% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the default risk premium for Kay's bonds is DRP = 1.30% 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 Kay's bonds? 1.55% 1.87% 1.62% 1.80% 1.94%

= .80% r(corp) = rf + ip + Ip + drp + mrp 7.50% = 2.5% + 1.50% + LP + 1.30% + ((5-1)*.1%)

5-year Treasury bonds yield 6.1%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year T-bonds is 0.4%. There is no liquidity premium on these bonds. What is the real risk-free rate, r*? 4.03% 3.80% 4.45% 3.42% 3.69%

= 3.80% r(corp) = rf + ip + Ip + drp + mrp 6.1% = rf + 1.9% + .4%

Koy Corporation's 5-year bonds yield 11.75%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Koy's bonds is LP = 0.75% 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 default risk premium (DRP) on Koy's bonds? 5.85% 5.09% 5.50% 6.44% 7.31%

= 5.85% r(corp) = rf + ip + Ip + drp + mrp 11.75% = 3% + 1.75% + .75% +drp + ((5-1)*.1%)

Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 4.60%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. 7.29% 8.10% 10.13% 6.08% 7.70%

= 8.10% expected rate of return is shown below: = Real risk-free rate + future rate of inflation + default risk premium + liquidity risk premium + maturity risk premium 3.50 + 4.60 = 8.10

If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 11.9%, 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? 6.41% 5.46% 5.35% 4.40% 5.30%

=5.30 % i got a 19/20 on this i think this is the one i got wrong bc i found the answer online and just went with it r(corp) = rf + ip + Ip + drp + mrp 6.2% = rf + IP + .4% + drp + 1.3%

Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 4.20%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity, hence the pure expectations theory is NOT valid. What rate of return would you expect on a 4-year Treasury security? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. 8.54% 7.22% 8.80% 8.01% 7.92%

=8.80% rate on return = real rate + inflation rate + per yr. maturity risk premium * T yrs. of maturity r = 4.20% + 4.20% +.10%(4)

A bond trader observes the following information: The Treasury yield curve is downward sloping. Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds. Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields. On the basis of this information, which of the following statements is most CORRECT? A 5-year corporate bond must have a higher yield than a 10-year Treasury bond. The corporate yield curve must be flat. Since the Treasury yield curve is downward sloping, the corporate yield curve must also be downward sloping. A 10-year corporate bond must have a higher yield than a 5-year Treasury bond. A 10-year Treasury bond must have a higher yield than a 10-year corporate bond.

A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.

Which of the following would be most likely to lead to a higher level of interest rates in the economy? Households start saving a larger percentage of their income. The level of inflation begins to decline. The economy moves from a boom to a recession. Corporations step up their expansion plans and thus increase their demand for capital. The Federal Reserve decides to try to stimulate the economy.

Corporations step up their expansion plans and thus increase their demand for capital.

Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant? If the pure expectations theory holds, the Treasury yield curve must be downward sloping If the pure expectations theory holds, the corporate yield curve must be downward sloping The expectations theory cannot hold if inflation is decreasing If inflation is expected to decline, there can be no maturity risk premium If there is a positive maturity risk premium, the Treasury yield curve must be upward sloping.

If the pure expectations theory holds, the Treasury yield curve must be downward sloping

Short Corp just issued bonds that will mature in 10 years, and Long Corp issued bonds that will mature in 20 years. Both bonds promise to pay a semiannual coupon, they are not callable or corvertible, and they are equally liquid. Further assume that the Treasury yield curve is based only on the pure expectations theory. Under these conditions, which of the following statements is CORRECT? If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have a lower yield than Long's bonds. If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds. If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than Short's bonds. If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal. If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield.

If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds.

Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that Inflation is expected to decline in the future. The economy is not in a recession. Long-term bonds are a better buy than short-term bonds. Long-term interest rates are more volatile than short-term rates. Maturity risk premiums could help to explain the yield curve's upward slope.

Maturity risk premiums could help to explain the yield curve's upward slope.

If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill? It is impossible to tell without knowing the relative risks of the two securities. The yields on the two securities would be equal. The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium. It is impossible to tell without knowing the coupon rates of the bonds. The yield on a 10-year bond would be less than that on a 1-year bill.

The yield on a 10-year bond would be less than that on a 1-year bill.

If the pure expectations theory is correct, a downward sloping yield curve indicates that interest rates are expected to decline in the future. True False

True

The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) inflation. True False

True

The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called "interest rate risk," or "price risk." True False

True