The possibility that a bond issuer will not pay back the investor in a timely manner is the essence of:
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:
The “yield curve” shows:
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)
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?
Suppose we observe the following U.S. Treasury yields at one point in time:
If the “unbiased expectations theory” is correct, what is the expected interest rate for the 1-year period starting two years from now?
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.
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