1. The one-year interest rate over the next three years is expected to be 5.00%, 7.00% 10.00%. The liquidity premium for one- to three-year bonds: 0%, 0.25%, 0.75%. What is the interest rate on the three year bond?
A. 7.75%
B. 8.33%
C. 8.08%
D. 7.67%
2. The current one year interest rate is 5.00% on a T-bill. The current two year interest is 7.00% on the T-note. What is the market predicting about the interest rate on a one year bond in year 2(one year from now) solely based on the expectations theory?
A. 6.00%
B. 7.75%
C. 9.00%
D. 12.00%
3ased on Table 1 which issue (s) has (have) an error in the reported prices.
Table 1
Issue Coupon Maturity Yield Price
A 7.00% 16 8.00% 104.02
B 7.00% 4 3.02% 99.14
C 5.00% 10 3.00% 102.5
D 5.50% 20 3.00% 104.15
A. A
B. B
C. C
D. D
E. A and B
4. A 10-year, 9.00% coupon bond with a face value of $1,000 is currently selling for $900. Compute your rate of return if you sell the bond next year for $936.
A. 4.00%
B. 14.00%
C. 11.11%
D. 16.45%
5. Based on Table 3, what is the liquidity risk premium?
Table 3
Investment Maturity Liquidity Default Risk Interest Rate
1 2 High Low 2.00%
2 2 Low Low 2.52%
3 7 Low Low 3.52%
4 8 High Low 4.03%
5 8 Low High 5.53%
A. 1.50%
B. 1.52%
C. 2.26%
D. 0.52%
Based on Table 3, what is the default risk premium?
A. 0.51%
B. 1.50%
C. 0.98%
D. 1.03%
PLEASE SHOW HOW TO SOLVE MANUALLY NOT WITH EXCEL