Question

 

1-The real interest rate is 0.21%, a 1-year T-Bill rate is 1.09% and the 2 year T-Note rate is 1.36% with no MRP. What is the inflation expected the year after next?

2-If you purchase a 20-year T-bond, which of the following sources of risk are you most concerned about?

A)The possibility that you will not be able to resell the T-bond.

B)The possibility that the bond's MRP will be zero

C)The possibility that the issuer will default on the T-bond.

D)The possibility that the present value of the T-bond's future cash flows will change.

3-You decide to finance a new 65" TV under the credit policy of a local electronics vendor. You will pay the TV off over 3 years at a rate of 18%. If the inflation premium is 2%, the default risk premium is 12% and the maturity risk premium is 1%, what real interest rate will the vendor earn?

A)33%

B)1%

C)3%

D)15%

4-Inflation this year, next, year and the year after next are expected to be 1.34%, 1.45, and 1.57 respectively. What is the inflation premium on a 3 year T-Note?

5-Your friend Kendall is battling down times and wants to buy an electronic dog to cheer himself up. Kendall is broke at the moment, so you agree to loan him $500 if he will pay you $725 when he completes his Ph.D. in 3 years. You require a real interest rate of 5% and estimate that inflation over each of the 3 years will be 3%, 3.5%, and 2.5%, respectively. What default risk premium have you included in the interest rate on your loan to Kendall?

A)1%

B)37%

C)7%

D)31%

Answer 1

1.
=1.09%-0.21%
=0.8800%

2.
The possibility that the present value of the T-bond's future cash flows will change.

3.
=18%-2%-12%-1%
=3.0000%

4.
=(1.34%+1.45%+1.57%)/3
=1.4533%

5.
=(725/500-1)-(3%+3.5%+2.5%)/3-5%
=37.0000%