1. Interest rates on 1-year, 2-year, and 3-year Treasury bills are 5%, 6%, and 7% respectively. Assume that the pure expectations theory holds and that the market is in equilibrium. Which of the following statements is correct??
a. ?The liquidity risk premium is highest for Year 1.
b. ?The maturity risk premium is positive.
c. ?The default risk premium is highest for Year 2.
d. ?The market expects one-year rates to be 7% one year from today.
e. ?Interest rates are expected to fall over the next two years.
2. Banks that need additional funds to meet the reserve requirements of the Federal Reserve:?
a. ?borrow from banks with excess reserves.
b. ?issue treasury bills to investors.
c. ?borrow from the state government of the state where their headquarters are located.
d. ?decrease the coupon interest rate on the bonds issued to raise funds.
e. ?exercise the call option on the loans extended to small businesses.