1)Which tend to be more volatile, short or long term interest rates?2)If the inflation rate was 3.00% and the nominal interest rate was 6.20% over the last year, what was the real rate of interest over the last year? Disregard cross-product terms: that is, if averaging is required, use the arithmetic average3)Some characteristics of the determinants of nominal interest rates are listed below: Identify the components(determinants)ie: a)Liquidity risk premium, b)Real risk-free rate c)Inflation premium d) Default risk premium e)Nominal risk-free rate f) Maturity risk premium-The rate on short-term U.S. Treasury securities, assuming there is no inflation.-The rate on a Treasury bill or a Treasury bond-The premium added as a compensation for the risk that an investor will not get paid in full-The premium added to the equilibrium interest rate on a security that cannot be bought or sold quickly enough to prevent or minimize loss.-The premium added to the risk-free rate that reflects the average sustained increase in the general level of prices for goods and services expected over the security’s entire life.-The premium that reflects the risk associated with changes in interest rates for a long-term security.4)Based on the pure expectgations theory, is the following true or false? A certificate of deposit (CD) for two years will have the same yield as a CD for one year followed by an investment in another one-year CD after one year?5)The yield on a one-year Treasury security is 4.69% and the two-year Treasury security has a 5.63% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now?a)7.501%b)6.58%c)5.593%d)8.357%6)On a one year-Treasury security the yield is 4.69% and 5.63% on a two year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two years security does and it is 0.45%. What is the market’s estimate of the one-year Treasury rate one year from now?a)7.201%b)4.820%c)5.67%d)6.464%7)Suppose the yield on a two-year Treasury security is 5.83% and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market’s estimate of the three year Treasury rate two years from now? a)6.61%b)7.10%c)6.53%d)6.45%8)Suppose that a firm is facing an upward-sloping yield curve and needs to borrow money to invest in production. Does this mean that the firm should consider borrowing only at short- term rates?a)yesb)no9)Credit ratings affect the yields on bonds. Based on each scenerio described in the table below, determine if yields for each will a)increase or decrease and if it will be b)more expensive or less expensive, as compared to other players in the market, for a company to borrow money from the bond market.a)A company’s interest coverage ratio improves.b)There is an increase in the perceived marketability of a company’s bond, so the liquidity decreases.c)Company X’s credity rating was downgraded from AA to BBB.d)A start-up company is struggling with finances for its projects.b)
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