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QUESTION 1 The possibility that a bond issuer will not pay back the investor in a timely manner is the essence of: Interest rate riskDefault riskOperational riskExchange rate riskInflation riskQUESTI
QUESTION 1
The possibility that a bond issuer will not pay back the investor in a timely manner is the essence of:
 Interest rate risk
 Default risk
 Operational risk
 Exchange rate risk
 Inflation risk
QUESTION 2
Jim owns a corporate bond issued by Packer Freezers Inc. The company is doing okay, and it pays its coupons in a timely manner. But Jim wants to sell the bond and his broker is having a hard time finding a willing buyer. Jim appears to be having a firsthand encounter with:
 Liquidity risk
 Inflation risk
 Operational risk
 Risk of fraud
 Default risk
QUESTION 3
The "yield curve" shows:
 Interest rates observed at a point in time, on securities of different maturity.
 Nominal interest rates, for various alternative expected inflation rates.
 Real interest rates, computed at various alternative expected inflation rates.
 Bond prices, computed for various alternative discount rates.
 Interest rates observed at different times, for securities having the same maturity.
QUESTION 4
Assume the unbiased expectations theory is true. The current, 1year Treasury yield is 4%. Suppose the market expects that the 1year Treasury yield will be 7% in one year's time. What is the current 2year Treasury yield? (Nearest tenth of a percent)
 11.0%
 14.5%
 7.0%
 22.0%
 5.5%
QUESTION 5
Suppose the unbiased expectations theory is true. Further, we observe yields on U.S. Treasury securities today and see the following:
1year security: 2%
2year security: 4%
3year security: 5%
Which of the following is true?
 The 2year security has a 2 percent liquidity premium.
 The 3year security has a 1 percent liquidity premium.
 We expect yields to fall in the future.
 We expect yields to rise in the future.
QUESTION 6
Suppose we observe the following U.S. Treasury yields at one point in time:
1year 8.0%
2year 7.0%
3year 6.5%
If the "unbiased expectations theory" is correct, what is the expected interest rate for the 1year period starting two years from now?
 7.0%
 6.0%
 8.0%
 6.75%
 5.5%
QUESTION 7
A particular security's equilibrium rate of return is 8%. For all securities, the inflation risk premium is 1.75% and the real interest rate is 3.5%. The security's liquidity risk premium is 0.25% and maturity risk premium is 0.85%. The security has no special covenants. Calculate the security's default risk premium.
 2.28%
 0.95%
 2.46%
 1.65%
 1.32%
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 ANSWER

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