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problem1: Assumee the real risk-free rate is 3.50 percent, the average future inflation rate is 2.25 percent, and a maturity premium of 0.10 percent per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity. What rate of return would you expect on a five year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.
[A] 6.15%
[B] 6.25%
[C] 6.35%
[D] 5.95%
[E] 6.05%

problem2: If ten year T-bonds have a yield of 5.2 percent, ten year corporate bonds yield 7.5 percent, the maturity risk premium on all 10-year bonds is 1.1 percent, and corporate bonds have a 0.2 percent liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?
[A] 2.20%
[B] 2.30%
[C] 2.40%
[D] 2.00%
[E] 2.10%

problem3: Which would be most likely to increase the coupon rate that is required to enable a bond to be issued at par?
[A] The rating agencies change the bond's rating from Baa to Aaa.
[B] Making the bond a first mortgage bond rather than a debenture.
[C] Adding a call provision.
[D] Adding additional restrictive covenants that limit management's actions.
[E] Adding a sinking fund.

Basic Finance, Finance

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