Question 1) If the risk-free rate is 6.25%, the inflation premium is 2% and the liquidity premium is 0.5%, the long-term Treasury bond rate should be:
A. 6.75%
B. 7.75%
C. 8.25%
D. 8.75%
E. None of the above
Question 2) A 20 year U.S. Government bond with a 10-percent annual coupon rate sells at $1,000 (par value) when prevailing interest rates on comparable securities are 10 percent. When interest rates on comparable securities drop to 8 percent this bond has a price of $1,197.90. On the other hand, when comparable rates rise to 12 percent the bond's price falls to $849.50. The price elasticity of this bond, when rates move downward from the coupon rate, must be (to the nearest thousandth place):
A. -0.990
B. -0.779
C. -0.550
D. -0.880
E. None of the above
Question 3) A home mortgage loan for $80,000 is available from the neighboring bank at an interest rate of one percent per month. The loan will mature in 25 years. Approximately what payment must the borrower make each month under the terms of this loan agreement?
A. $692
B. $729
C. $843
D. $950
E. None of the above
Question 4) A stock purchased one year ago today at $10 per share is sold today at $15 per share. It has paid a dividend this year of $3. The investor's before-tax holding-period yield must be:
A. 12 percent
B. 20 percent
C. 40 percent
D. 60 percent
E. 80 percent
Question 5) Suppose a $1,000 par-value bond was issued last year with a promised annual rate of return (yield) of 6 percent when market interest rates on comparable securities were also 6 percent. Thus, the bond pays its holder $60 annually in interest. Today, one year later, market interest rates on comparable securities are 10 percent. The price of the 6 percent bond will approach what dollar figure?
A. $1,060
B. $940
C. $750
D. $600
E. $500
Question 6) Suppose the GDP deflator index has a base period of 100 in 1990 and by the year 2001 the deflator had an index value of 135. What was the percentage change in the purchasing power of this nation's currency?
A. Increased by 35 percent
B. Decreased by 26 percent
C. Increased by 135 percent
D. Decreased by 74 percent
E. None of the above