11 May Question1. Which of the following factors would
Question
1. Which of the following factors would be most likely to lead to an increase in nominal interest rates?
a. Households reduce their consumption and increase their savings.
b. A new technology like the Internet has just been introduced, and it increases investment opportunities.
c. There is a decrease in expected inflation.
d. The economy falls into a recession.
e. The Federal Reserve decides to try to stimulate the economy.
2. The real risk-free rate is 3.05%, inflation is expected to be 2.75% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, what is the equilibrium rate of return on a 1-year Treasury bond?
a. 5.51%
b. 5.80%
c. 6.09%
d. 6.39%
e. 6.71%
3. Kelly Inc’s 5-year bonds yield 7.50% and 5-year T-bonds yield 4.90%. 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 = 2.2%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?
a. 0.73%
b. 0.81%
c. 0.90%
d. 0.99%
e. 1.09%
4. Kop Corporation’s 5-year bonds yield 6.50%, and T-bonds with the same maturity yield 4.40%. The default risk premium for Kop’s bonds is DRP = 0.40%, the liquidity premium on Kop’s bonds is LP = 1.70% versus zero on T-bonds, the inflation premium (IP) is 1.50%, and the maturity risk premium (MRP) on 5-year bonds is 0.40%. What is the real risk-free rate, r*?
a. 2.04%
b. 2.14%
c. 2.26%
d. 2.38%
e. 2.50%
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