1. A corporation's 10-year bonds have an equilibrium rate of return of 7 percent. For all securities, the inflation risk premium is 1.50 percent and the real interest rate is 3.0 percent. The security's liquidity risk premium is 0.15 percent and maturity risk premium is 0.70 percent. The security has no special covenants. What is the bond's default risk premium?
a. 1.40%
b. 1.65%
c. 5.35%
d. 9.35%
2. One-year Treasury bills currently earn 5.50 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.75 percent. The liquidity premium on two-year securities is 0.075 percent. If the liquidity theory is correct, what should the current rate be on two-year Treasury securities?
a. 3.775%
b. 5.625%
c. 5.662%
d. 11.325%
3. Bonds sell at a discount when the market rate of interest is
a. less than the bond's coupon rate.
b. greater than the bond's coupon rate.
c. equal to the bond's coupon rate.
d. None of the above is true.