Please show work A one-year bond currently pays 5% interest and two-year bond cu
ID: 1157811 • Letter: P
Question
Please show work
A one-year bond currently pays 5% interest and two-year bond currently pays 5.5%. If the term premium for two-year bonds is 0.2% what is the expected interest rate on one-year bond next year?
A)
4.975%
B)
5.6%
C)
4.5%
D)
4.75%
A one-year bond currently pays 1.2% interest. It's expected that it will pay 1.8% next year and 3.2% the following year. The two-year term premium is 0.1% while the three-year term premium is 0.25%. What is the interest rate on a three-year bond according to the liquidity premium theory?
A)
2.07%
B)
2.17%
C)
2.32%
D)
6.45%
What is a correct risk premium on 10 year municipal bonds with 2.5% yield if 10 year Treasury bonds have 3% yield and your marginal federal income tax rate is 30%?
13)
_____
A)
3%.
B)
2.1%.
C)
0.4%.
D)
-0.5%.
What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year?
10)
_____
A)
25 percent
B)
10 percent
C)
5 percent
D)
-5 percent
Explanation / Answer
Ans 1)
(1+5.5%)^2=(1+5%)(1+x%+0.2%)
(1.055^2/1.05)-1=x%+0.2%
x=5.6%
Hence option C is correct response
Ans 4)
return would be calculated as (50+1200-1000)/1000=25%
Hence option A is correct response
Ans 3)
Rate on Municipal Bond-Real Interest for treasury bond (1-tax rate)=Risk Premium
2.5%-3%(1-0.3)=0.4%
HEnce correct answer is option C