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##### 17. Assume that expected rates of inflation over t...

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17. Assume that expected rates of inflation over the next 5 years are 4 percent, 7 percent, 10 percent, 8 percent, and 6 percent, respectively. What is the average expected inflation rate over this 5-year period? (Points : 5) 6.5% 7.5% 8.0% 6.0% 7.0% 18. Which of the following statements is correct? (Points : 5) The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds. Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds. According to the market segmentation theory of the term structure of interest rates, we should normally expect the yield curve to slope downward. The expectations theory of the term structure of interest rates states that borrowers generally prefer to borrow on a long-term basis while savers generally prefer to lend on a short-term basis, and that as a result, the yield curve normally is upward sloping. If the maturity risk premium was zero and the rate of inflation was expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope. 20. 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 most correct? (Points : 5) The maturity risk premium is positive. Interest rates are expected to rise over the next two years. The market expects one-year rates to be 5.5% one year from today. Answers a, b, and c are all correct. Only answers b and c are correct.

Paper#11956 | Written in 18-Jul-2015

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