Which of the following are correct? i. The liquidity premium for a 2-year government bond is...

Which of the following are correct?
i. The liquidity premium for a 2-year government bond is higher than the liquidity premium for a 5-year government bond.
ii. The liquidity premium for a 3-year government bond is lower than the liquidity premium for a 3-year corporate bond.
iii. The expected return from holding an illiquid two year zero-coupon bond to maturity is higher than the expected return from buying a liquid one-year zero-coupon bond (and holding it to maturity) followed by investing in another liquid one-year zero coupon bond (and holding it to maturity).
iv. The expected one-year rate in one year's time is lower under the Liquidity Premium Hypothesis than the expected one-year rate in one year's time under the Pure Expectations Hypothesis (assuming that two-year bonds are illiquid and one-year bonds are liquid).

The correct answer is:

Expert Solution

The liquidty premium of higher tenure bond will hold a higher liquidity premium.

The liquidty of governemnt bond is always higher than of corporate bond. Thus liquidity premium will be always lower.

The expected return of investing in illiquid bond will be higher than the expected return from buying liquid bonds of shorter tenure due to presence of liquidity premium.

The expected one-year rate in one year's time is higher under the Liquidity Premium Hypothesis than the expected one-year rate in one year's time under the Pure Expectations Hypothesis as longer tenure will hold more return in Liquidity Premium Hypothesis than Pure Expectations Hypothesis

thus, correct answer is ii, iii

jeff jeffy answered 2 years ago

1. Assume a bond is currently selling at premium. Which of the following statement is correct...

1. Assume a bond is currently selling at premium. Which of the following statement is correct if YTM on the bond increases? Multiple Choice It is possible that this bond sells at discount after YTM rises. The bond will still sell at premium. The coupon payments will be adjusted to the new discount rate. The coupon rate of the bond will increase. 2. What is the current price of a $1,000 par value, 6% coupon bond that pays interest semi-annually...

You have determined the following data for a given bond: Real risk-free rate (r*) = 3%; inflation premium = 8%; default risk premium = 2%; liquidity premium = 2%; and maturity risk premium = 1%.

You have determined the following data for a given bond: Real risk-free rate (r*) = 3%; inflation premium = 8%; default risk premium = 2%; liquidity premium = 2%; and maturity risk premium = 1%.What is the interest rate on short-term Treasury securities, or T-bills, of the relevant maturity?What is the interest rate on long-term corporate bonds, of the relevant maturity?

2. A company holds a 20 year bond that was purchased at a premium. The bond...

2. A company holds a 20 year bond that was purchased at a premium. The bond pays semi-annual coupons. The face amount is equal to the redemption amount of $10,000. The amount of amortization of the premium (principal paid) in the 4th coupon was 80.21. The amount of amortization of the premium (principal paid) in the 7th coupon was 86.38. (a) (8 points) Find the yield rate. (b) (10 points) Find the price of the bond. (c) (6 points) Write...

Which of the following statements is most correct with regards to a 10 year bond with...

Which of the following statements is most correct with regards to a 10 year bond with a 9% annual coupon rate and a YTM of 8%? a) The bond is selling at a discount. b) The bond’s current yield is greater than 9 percent. c) If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.

According to the liquidity premium theory of interest rates, Tell me the letter of the correct...

According to the liquidity premium theory of interest rates, Tell me the letter of the correct answer to the question below AND tell me why the other answers are incorrect. * According to the liquidity premium theory of interest rates, * A. Long term spot rates are totally unrelated to expectations of future short-term rates. B.Long-term spot rates are higher than the average of current and expected future short-term rates. C.Investors are indifferent between different maturities if the long-term spot...

2. Which of the following is NOT correct with regard to the MCH I presentation complex?...

2. Which of the following is NOT correct with regard to the MCH I presentation complex? a. It can bind the CD8 conplex b. It is loaded with antigen inside the phagolysosome c. It can present antigens to cytotoxic T cells 3. which type of immune system cell is responsible for activating cyctotoxic T cells? a. Th2 b. Natural Killer Cells c. Plasma Cells d. Th1

Given the following government bond yields: one-year, 2% and four-year, 9.5%. What is the two-year government...

Given the following government bond yields: one-year, 2% and four-year, 9.5%. What is the two-year government bond yield one would linearly interpolate from this information? 3.25% 4.50% 3.67% none of the above. A 15 year coupon bond, that makes payments annually, has a coupon rate of 5%. The market discount rate on the bond is 8%. If interest rates were to rise by 100 bps today, how long would it take before the reinvested coupon payments offset the capital loss?...

Which of the following regarding bond immunization is NOT correct? a. Bond immunization is to gaurantee...

Which of the following regarding bond immunization is NOT correct? a. Bond immunization is to gaurantee an interest rate for a desired period of investment horizon. b. It is very easy to achieve immunization using a single bond. Use of portfolio of bonds is not often needed. c. To achieve immunization, it is important to match your investment horizon with the duration of your bond or portfolio of bonds. d. When your porfolio is immunized, any change of interest rates...

33. Which of the following is the correct calculation of the premium over conversion value? a. market...

33. Which of the following is the correct calculation of the premium over conversion value? a. market price minus par value b. market price minus conversion ratio c. market price minus conversion value d. market price minus stock price 35. A bond has a par value of $1,000, a market value of $900, a conversion price of $45, and an associated stock price of $40. The premium over conversion value is a. $0. b. $5.00. c. $11.11. d. $100.00.

How is the inflation premium and risk premiums determined? I understand that the liquidity risk and...

How is the inflation premium and risk premiums determined? I understand that the liquidity risk and maturity risk make up the risk premium, but how are these things determined, and who decides them?

Question