Description
Chapter 2:
Study Problems: 2-1 to 2-5
Answers must be typed into a word document and submit. Show all the steps and procedures. Explain if needed.
Study Problems
All Study Problems are available in MyFinanceLab.
LO3 2-1. (Calculating the default-risk premium) At present, 10-year Treasury bonds are yield-
ing 4% while a 10-year corporate bond is yielding 6.8%. If the liquidity-risk premium
on the corporate bond is 0.4%, what is the corporate bond’s default-risk premium?
2-2. (Calculating the maturity-risk premium) At present, the real risk-free rate of inter-
est is 2%, while inflation is expected to be 2% for the next 2 years. If a 2-year Treasury
note yields 4.5%, what is the maturity-risk premium for this 2-year Treasury note?
Study Problems
All Study Problems are available in MyFinanceLab.
LO3 2-1. (Calculating the default-risk premium) At present, 10-year Treasury bonds are yield-
ing 4% while a 10-year corporate bond is yielding 6.8%. If the liquidity-risk premium
on the corporate bond is 0.4%, what is the corporate bond’s default-risk premium?
2-2. (Calculating the maturity-risk premium) At present, the real risk-free rate of inter-
est is 2%, while inflation is expected to be 2% for the next 2 years. If a 2-year Treasury
note yields 4.5%, what is the maturity-risk premium for this 2-year Treasury note?
CHAPTER 2. The Financial Markets and
LO4
will produce an 8% return next year, and you expect that your real rate of return on
2-3. (Inflation and interest rates) You’re considering an investment that you expect
this investment will be 6%. What do you expect inflation to be next year?
2-4. (Inflation and interest rates) What would you expect the nominal rate of interest
to be if the real rate is 4% and the expected inflation rate is 7%?
2-5. (Inflation and interest rates) Assume the expected inflation rate to be 4%. If the
current real rate of interest is 6%, what ought the nominal rate of interest to be?
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