13. Hanratty Inc.’s stock and the stock market have generated
the following returns over the past five years:
Year Hanratty Market (kM)
1 13% 9%
2 18 15
3 -5 -2
4 23 19
5 6 12
On the basis of these historical returns, what is the
estimated beta of Hanratty Inc.’s stock?
a. 0.7839
b. 0.9988
c. 1.2757
d. 1.3452
e. 1.5000
14. The one-year spot rate is 10% and the two-year spot rate
is 8%. If the one-
year spot rate expected in one year is 6%, according to the
liquidity
preference theory, what must be the one -year liquidity
premium
commencing one year from now?
a. .0353 b. .0373 c. .0363 d .0463
15. A 10-year Treasury bond currently yields 8 percent. The
real risk-free rate of interest, k*, is 4 percent. The maturity risk premium
has been estimated to be 0.1(t)%, where t = the maturity of the bond. Inflation
is expected to average 2 percent a year for each of the next five years. What
is the expected average rate of inflation between years five and ten?
a. 4% b. 4.5% c. 5% d. 5.5% e. 6%
16. The
10-year bonds of Gator Corporation are yielding 9 percent per year. Treasury
bonds with the same maturity are yielding 7.5 percent per year. The real
risk-free rate (k*) has not changed in recent years and is 3 percent. The
average inflation premium is 2.5 percent and the maturity risk premium takes
the form: MRP = 0.l(t – l)%, where t = number of years to maturity. If the
liquidity premium is 0.6 percent, what is the default risk premium on the
corporate bond?
a. 1% b. .9% c. .8% d. 0.7% e. .6%
17. Which of
the following statements is most correct?
a. Downward
sloping yield curves are inconsistent with the expectations theory.
b. The shape
of the yield curve depends only on expectations about future inflation.
c. If the
expectations theory is correct, a downward sloping yield curve indicates that
interest rates are expected to decline in the future.
d. Statements
a and c are correct.
e. None of
the statements above is correct.
18. The real risk-free rate of interest is expected to
remain constant at 3 percent for the foreseeable future. However, inflation is
expected to steadily increase over the next 20 years, so the Treasury yield
curve is upward sloping. Assume that the expectations theory holds. You are
considering two corporate bonds: a 5-year corporate bond and a 10-year
corporate bond, each of which has the same default risk and liquidity risk.
Given this information, which of the following statements is most correct?
a. Since the
expectations theory holds, this implies that 10-year Treasury bonds must have
the same yield as 5-year Treasury bonds.
b. Since the
expectations theory holds, this implies that the 10-year corporate bonds must
have the same yield as the 5-year corporate bonds.
c. Since
the expectations theory holds, this implies that the 10-year corporate bonds
must have the same yield as 10-year Treasury bonds.
d. The
10-year Treasury bond must have a higher yield than the 5-year corporate bond.
e. The
10-year corporate bond must have a higher yield than the 5-year corporate bond.
19. Which of the following statements is most correct?
a. The yield
on a 2-year corporate bond will always exceed the yield on a 2-year Treasury
bond.
b. The yield
on a 3-year corporate bond will always exceed the yield on a 2-year corporate
bond.
c. The
yield on a 3-year Treasury bond will always exceed the yield on a 2-year
Treasury bond.
d. All of
the statements above are correct.
e. Statements
a and c are correct.
20. You are
given the following data:
k* = real risk-free rate: 4%
Constant inflation premium: 7%
Maturity risk premium: 1%
Default risk premium for AAA bonds: 3%
Liquidity premium for long-term T-bonds: 2%
Assume that a highly liquid market does not exist for
long-term T-bonds, and the expected rate of inflation is a constant. Given
these conditions, the nominal risk-free rate for T-bills (SHORT-TERM) is , and
the rate on long-term Treasury bonds is .
a. 4%; 14%
b. 4%; 15%
c. 11%; 14%
d. 11%; 15%
e. 11%; 17%
21. You
observe the following yields on Treasury securities of various maturities:
Maturity Yield
1 year 6.0%
3 years 6.4
6 years 6.5
9 years 6.8
12 years 7.0
15 years 7.2
Using the expectations theory, forecast the interest rate on
9-year Treasuries, six years from now. (That is, what will be the yield on
9-year Treasuries, issued in 6 years’ time?)
a. 6.50%
b. 6.65%
c. 6.80%
d. 7.67%
e. 8.00%
22. The real
risk-free rate is expected to remain at 3 percent. Inflation is expected to be
3 percent this year and 4 percent next year. The maturity risk premium is
estimated to be equal to 0.1(t – 1)%, where t = the maturity of a bond (in
years). All Treasury securities are highly liquid, and therefore have no
liquidity premium. Three-year Treasury bonds yield 0.5 percentage points
(0.005) more than 2-year Treasury bonds (that is, 2-year bond yield plus 0.5%).
What is the expected level of inflation in Year 3?
a. 4.5%
b. 4.7%
c. 5.0%
d. 5.6%
e. 6.3%
23. If the
Federal Reserve sells $50 billion of short-term U. S. Treasury securities to
the public, other things held constant, what will this tend to do to short-term
security prices and interest rates?
a. Prices
and interest rates will both rise.
b. Prices
will rise and interest rates will decline.
c. Prices
and interest rates will both decline.
d. Prices
will decline and interest rates will rise.
e. There
will be no changes in either prices or interest rates.
