Author: Anonymous

Keys Corporation’s 5-year bonds yield 5.1%, and 5-year T-bonds yield 3.7%. The real risk-free rate is r* =  1.5%, the inflation premium  for 5 years bonds is  IP = 1.8%, the default risk premium for Keys’ bonds is DRP = 0.33% 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 Keys’ bonds?

One-year government bonds yield 5.7 percent and 2-year government bonds yield 5.8 percent.  Assume that the expectations theory holds.  What does the market believe the rate on 1-year government bonds will be one year from today?

Drongo Corporation’s 4-year bonds currently yield 6.3 percent and have an inflation premium  of 3.5%.  The real risk-free rate of interest, r*, is 1 percent and is assumed to be constant.   The maturity risk premium (MRP) is estimated to be 0.1%(t – 1), where t is equal to the time to  maturity.  The default risk and liquidity premiums for this company’s bonds total 1.5 percent and are believed to be the same for all bonds issued by this company.  If the average inflation  rate is expected to be 1.4 percent for years 5, 6, and 7, what is the yield on a 6-year bond for  Drongo Corporation?

Terry Austin is 30 years old and is saving for her retirement.  She is planning  on making 24 contributions to her retirement account at the beginning of  each of the next 24 years.  The first contribution will be made today  (t = 0) and the final contribution will be made 23 years from today (t = 23). The retirement account will earn a return of 8.3 percent a year.  If each  contribution she makes is $4,317.00 how much will be in the retirement account 23 years from now (t = 23)?

Terry Austin is 30 years old and is saving for her retirement.  She is planning  on making 32 contributions to her retirement account at the beginning of  each of the next 32 years.  The first contribution will be made today  (t = 0) and the final contribution will be made 31 years from today (t = 31). The retirement account will earn a return of 10.2 percent a year.  If each  contribution she makes is $3,279.00 how much will be in the retirement account 31 years from now (t = 31)?

Suppose the real risk-free rate is 2.5%, the average future inflation rate is  1.7%, a maturity premium of 0.08% per year to maturity applies, i.e., MRP =  0.08%(t), where t is the years to maturity.  Suppose also that a liquidity premium  of 1% and a default risk premium of 0.4% applies to A-rated corporate 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.   

Currently, 3-year Treasury securities yield 6.7%, 7-year Treasury securities yield  6.9%, and 10-year Treasury securities yield 7.2%. If the expectations theory is  correct, what does the market expect will be the yield on 3-year Treasury securities seven years from today?

A bank recently loaned you $11,048.00 to buy a car.  The loan is for 4 years  and is fully amortized.  The nominal rate on the loan is 10.4 percent, and payments are made at the end of each month.  What will be the remaining balance on the loan after you make payment number 39?

You observe the following yield curve for Treasury securities: Maturity             Yield 1 Year                4.20% 2 Years              5.30% 3 Years              5.80% 4 Years              6.20% 5 Years              7.30% Assume that the pure expectations hypothesis holds.  What does the market expect will be  the yield on 4-year securities, 1 year from today?

You observe the following yield curve for Treasury securities: Maturity             Yield 1 Year                1.50% 2 Years              2.60% 3 Years              3.50% 4 Years              4.00% 5 Years              4.80% Assume that the pure expectations hypothesis holds.  What does the market expect will be  the yield on 3-year securities, 2 year from today?