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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 first-hand 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, 1-year Treasury yield is 4%. Suppose the market expects that the 1-year Treasury yield will be 7% in one year's time. What is the current 2-year 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:
1-year security: 2%
2-year security: 4%
3-year security: 5%
Which of the following is true?
- The 2-year security has a 2 percent liquidity premium.
- The 3-year 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:
1-year 8.0%
2-year 7.0%
3-year 6.5%
If the "unbiased expectations theory" is correct, what is the expected interest rate for the 1-year 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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