c.Today’s 2-year interest rate is 7 percent.d.Today’s 3-year interest rate is 7 percent.e.Today’s 3-year interest rate is 9 percent.
One-year government bonds yield 6 percent and 2-year government bonds yield 5.5 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?If the 1-year rate in one year is X;(6% + X)/2 = 5.5%;X = 5%.
The real risk-free rate, k*, is 3 percent. Inflation is expected to average 2 percent a year for thenext three years, after which time inflation is expected to average 3.5 percent a year. Assumethat there is no maturity risk premium. A 7-year corporate bond has a yield of 7.6 percent.Assume that the liquidity premium on the corporate bond is 0.4 percent. What is the default riskpremium on the corporate bond?k
= k* + IP
7.6%= 3.0% + (2%
3 + 3.5%
4)/7 + 0.0% + DRP
+ 0.4%7.6%= 3.0% + 2.8571% + 0.0% + DRP
+ 0.4%7.6%= 6.2571% + DRP
= 1.3429%.1. Which of the following statements is most correct?a.If you purchase 100 shares of Disney stock from your brother-in-law, this is anexample of a primary market transaction.b.If Disney issues additional shares of common stock, this is an example of a secondarymarket transaction.c.Statements a and b are correct.d.None of the statements above is correct.2. Assume that inflation is expected to steadily decline in the years ahead, but that the real risk-free rate, k*, is expected to remain constant. Which of the following statements is mostcorrect?a.If the expectations theory holds, the Treasury yield curve must be downward sloping.b.If the expectations theory holds, the yield curve for corporate securities must bedownward sloping.c.If there is a positive maturity risk premium, the Treasury yield curve must be upwardsloping.d.Statements b and c are correct.e.All of the statements above are correct.3. Which of the following factors are likely to lead to an increase in nominal interest rates?a.Households increase their savings rate.