FIN 390 EXAM 1 QUESTIONS WITH VERIFIED
ACCURATE ANSWERS
If liquidity influences the yield curve, the forward rate that is estimated without
considering liquidity premium would underestimate the market's expectation of the
future interest rate. - Answers - False
The forward rate is commonly used to represent the market's forecast of the future
interest rate. - Answers - True
The annualized yield on a three-year security is 13%; the annualized two-year interest
rate is 12%, while the one-year interest rate is 9%. What is the forward rate one year
ahead? (In other words, find the one-year interest rate that is anticipated one-year
ahead.)
a.
2.8%.
b.
115%.
c.
103%.
d.
15.1%. - Answers - D - 15.1%
Assume that the current yield on one-year securities is 6%, and that the yield on a two-
year security is 7%. If the liquidity premium on a two-year security is 0.4%, then the
one-year forward rate is
a.
8.0%.
b.
7.6%.
c.
3.0%.
d.
7.0%. - Answers - b.
7.6%.
, Assume that today, the annualized interest rate for a one-year security is 9%, the
annualized interest rate for a two-year security is 12%, and a three-year security has an
annualized interest rate of 14%. What is the one-year forward rate two years from now?
a.
12.67%
b.
21.36%
c.
18.11%
d.
15.67% - Answers - c.
18.11%
Assume that the Treasury bond yield today is 2 percentage points higher than it was
one year ago. Also assume that the credit (default) risk premium of an A-rated bond
declined by 0.4 percentage point since one year ago. A newly issued A-rated bond will
likely offer a yield today that is
a.
greater than the yield that was offered on an A-rated bond issued one year ago.
b.
equal to the yield that was offered on an A-rated bond issued one year ago.
c.
less than the yield that was offered on an A-rated bond issued one year ago.
d.
greater than or equal to the yield that was offered on an A-rated bond issued one year
ago. - Answers - a.
greater than the yield that was offered on an A-rated bond issued one year ago.
The bonds that are most sensitive to interest rate movements have
a.
no coupon and a short-term maturity.
b.
high coupons and a short-term maturity.
c.
high coupons and a long-term maturity.
ACCURATE ANSWERS
If liquidity influences the yield curve, the forward rate that is estimated without
considering liquidity premium would underestimate the market's expectation of the
future interest rate. - Answers - False
The forward rate is commonly used to represent the market's forecast of the future
interest rate. - Answers - True
The annualized yield on a three-year security is 13%; the annualized two-year interest
rate is 12%, while the one-year interest rate is 9%. What is the forward rate one year
ahead? (In other words, find the one-year interest rate that is anticipated one-year
ahead.)
a.
2.8%.
b.
115%.
c.
103%.
d.
15.1%. - Answers - D - 15.1%
Assume that the current yield on one-year securities is 6%, and that the yield on a two-
year security is 7%. If the liquidity premium on a two-year security is 0.4%, then the
one-year forward rate is
a.
8.0%.
b.
7.6%.
c.
3.0%.
d.
7.0%. - Answers - b.
7.6%.
, Assume that today, the annualized interest rate for a one-year security is 9%, the
annualized interest rate for a two-year security is 12%, and a three-year security has an
annualized interest rate of 14%. What is the one-year forward rate two years from now?
a.
12.67%
b.
21.36%
c.
18.11%
d.
15.67% - Answers - c.
18.11%
Assume that the Treasury bond yield today is 2 percentage points higher than it was
one year ago. Also assume that the credit (default) risk premium of an A-rated bond
declined by 0.4 percentage point since one year ago. A newly issued A-rated bond will
likely offer a yield today that is
a.
greater than the yield that was offered on an A-rated bond issued one year ago.
b.
equal to the yield that was offered on an A-rated bond issued one year ago.
c.
less than the yield that was offered on an A-rated bond issued one year ago.
d.
greater than or equal to the yield that was offered on an A-rated bond issued one year
ago. - Answers - a.
greater than the yield that was offered on an A-rated bond issued one year ago.
The bonds that are most sensitive to interest rate movements have
a.
no coupon and a short-term maturity.
b.
high coupons and a short-term maturity.
c.
high coupons and a long-term maturity.
