QUESTION -1 The possibility that a bond issuer will not pay back the investor in a timely manner is the essence of: Interest rate riskDefault riskOperational riskExchange rate riskInflation riskQUESTI

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QUESTION -1

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The possibility that a bond issuer will not pay back the investor in a timely manner is the essence of:

  1. Interest rate risk
  2. Default risk
  3. Operational risk
  4. Exchange rate risk
  5. Inflation risk

QUESTION -2

Jim owns a corporate bond issued by Packer Freezers Inc. The company is doing okay, and it pays its coupons in a timely manner. But Jim wants to sell the bond and his broker is having a hard time finding a willing buyer. Jim appears to be having a first-hand encounter with:

  1. Liquidity risk
  2. Inflation risk
  3. Operational risk
  4. Risk of fraud
  5. Default risk

QUESTION -3

The “yield curve” shows:

  1. Interest rates observed at a point in time, on securities of different maturity.
  2. Nominal interest rates, for various alternative expected inflation rates.
  3. Real interest rates, computed at various alternative expected inflation rates.
  4. Bond prices, computed for various alternative discount rates.
  5. Interest rates observed at different times, for securities having the same maturity.

QUESTION -4

Assume the unbiased expectations theory is true. The current, 1-year Treasury yield is 4%. Suppose the market expects that the 1-year Treasury yield will be 7% in one year’s time. What is the current 2-year Treasury yield? (Nearest tenth of a percent)

  1. 11.0%
  2. 14.5%
  3. 7.0%
  4. 22.0%
  5. 5.5%

QUESTION -5

Suppose the unbiased expectations theory is true. Further, we observe yields on U.S. Treasury securities today and see the following:

1-year security: 2%

2-year security: 4%

3-year security: 5%

Which of the following is true?

  1. The 2-year security has a 2 percent liquidity premium.
  2. The 3-year security has a 1 percent liquidity premium.
  3. We expect yields to fall in the future.
  4. We expect yields to rise in the future.

QUESTION 6

Suppose we observe the following U.S. Treasury yields at one point in time:

1-year 8.0%

2-year 7.0%

3-year 6.5%

If the “unbiased expectations theory” is correct, what is the expected interest rate for the 1-year period starting two years from now?

  1. 7.0%
  2. 6.0%
  3. 8.0%
  4. 6.75%
  5. 5.5%

QUESTION -7

A particular security’s equilibrium rate of return is 8%. For all securities, the inflation risk premium is 1.75% and the real interest rate is 3.5%. The security’s liquidity risk premium is 0.25% and maturity risk premium is 0.85%. The security has no special covenants. Calculate the security’s default risk premium.

  1. 2.28%
  2. 0.95%
  3. 2.46%
  4. 1.65%
  5. 1.32%

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