RMI 2303 FINAL EXAM QUESTIONS AND CORRECT
ANSWERS 100% VERIFIED
Four factors that determine the cost of money
- production opportunities
- time preference of consumption
- risk
- inflation
which of the following would be most likely to result in a higher level of interest rates in
the economy?
- ANSWER corporations step up their expansion plans and thus increase their demand
for capital
one of the four most basic determinants of the price of money is the availability of
investment opportunities and their expected rates of return if the investment
opportunities are relatively good, then the interest rates will tend to be relative high,
other things held constant - ANSWER true
Suppose the US treasury issued $50 billion of short-term securities and sold them to the
public. other things held constant, what would be the most likely effect on short term
securities' prices and interest rates? - ANSWER prices would decline and interest rates
would rise
Suppose the real risk free rate is 3%, the average expected future inflation rate is 6%,
and a maturity risk premium of.10% per year to maturity applies, where t is the number
of years to maturity. What rate of return would you expect on a 2 year treasury security?
- ANSWER 9.8%
Suppose 10 year T bonds have a yield of 5.3% and 10 year corporate bonds yield 7.1%.
Also, corporate bonds have a.25% liquidity premium versus a zero-liquidity premium for
, T bonds, and the maturity risk premium on both treasury and corporate bonds is 1.15%/
What is the default rick premium on corporate bonds? - ANSWER 1.55%
Suppose the yield on a 10 year T bond is currently 5.05% and that on a 10 year treasury
infltaed protected security (TIPS) is 3%. Suppose further that the MRP on a 10 year T
bond is.9%, no MRP is required on a TIPS, and that no liquidity premium is required on
any T bond. With this information, what is the anticipated average rate of inflation for the
next 10 years? - ANSWER 1.15%
The "yield curve" depicts the relationship between bonds' maturities and their yields. -
ANSWER true
In the forseeable future, the real risk free rate of interest, r*, will remain at 3%, inflation
is expected to rise at a constant rate, and the maturity risk premium will be.1(t - 1)%,
where t = number of years until the bond matures. Given this information, which of the
following statements is CORRECT? ANSWER the yield curve must slope upward
If future inflation is expected to increase and the maturity risk premium is greater than
zero, the treasury bond yield curve must be upward sloping - ANSWER true
if the MRP is greater than zero, the T bond yield curve must be upward sloping -
ANSWER false
if the MRP equals zero, the T bond yield curve must be flat - ANSWER false
Suppose the yield on a 1 year bond is currently 6%, but all investors expect 1 year rates
to be 7% one year from now and to rise to 8% two years from now. Assume also that the
pure expectations theory holds, hence the MRP equals zero. Which of the following
statements is correct? - ANSWER the interest rate today on a 3 year bond should be
approx. 7%
macroeconomic factors that determine interest rate levels - ANSWER - federal reserve
policy
ANSWERS 100% VERIFIED
Four factors that determine the cost of money
- production opportunities
- time preference of consumption
- risk
- inflation
which of the following would be most likely to result in a higher level of interest rates in
the economy?
- ANSWER corporations step up their expansion plans and thus increase their demand
for capital
one of the four most basic determinants of the price of money is the availability of
investment opportunities and their expected rates of return if the investment
opportunities are relatively good, then the interest rates will tend to be relative high,
other things held constant - ANSWER true
Suppose the US treasury issued $50 billion of short-term securities and sold them to the
public. other things held constant, what would be the most likely effect on short term
securities' prices and interest rates? - ANSWER prices would decline and interest rates
would rise
Suppose the real risk free rate is 3%, the average expected future inflation rate is 6%,
and a maturity risk premium of.10% per year to maturity applies, where t is the number
of years to maturity. What rate of return would you expect on a 2 year treasury security?
- ANSWER 9.8%
Suppose 10 year T bonds have a yield of 5.3% and 10 year corporate bonds yield 7.1%.
Also, corporate bonds have a.25% liquidity premium versus a zero-liquidity premium for
, T bonds, and the maturity risk premium on both treasury and corporate bonds is 1.15%/
What is the default rick premium on corporate bonds? - ANSWER 1.55%
Suppose the yield on a 10 year T bond is currently 5.05% and that on a 10 year treasury
infltaed protected security (TIPS) is 3%. Suppose further that the MRP on a 10 year T
bond is.9%, no MRP is required on a TIPS, and that no liquidity premium is required on
any T bond. With this information, what is the anticipated average rate of inflation for the
next 10 years? - ANSWER 1.15%
The "yield curve" depicts the relationship between bonds' maturities and their yields. -
ANSWER true
In the forseeable future, the real risk free rate of interest, r*, will remain at 3%, inflation
is expected to rise at a constant rate, and the maturity risk premium will be.1(t - 1)%,
where t = number of years until the bond matures. Given this information, which of the
following statements is CORRECT? ANSWER the yield curve must slope upward
If future inflation is expected to increase and the maturity risk premium is greater than
zero, the treasury bond yield curve must be upward sloping - ANSWER true
if the MRP is greater than zero, the T bond yield curve must be upward sloping -
ANSWER false
if the MRP equals zero, the T bond yield curve must be flat - ANSWER false
Suppose the yield on a 1 year bond is currently 6%, but all investors expect 1 year rates
to be 7% one year from now and to rise to 8% two years from now. Assume also that the
pure expectations theory holds, hence the MRP equals zero. Which of the following
statements is correct? - ANSWER the interest rate today on a 3 year bond should be
approx. 7%
macroeconomic factors that determine interest rate levels - ANSWER - federal reserve
policy
