1. One-year Treasury bills currently earn 2.70 percent. You expected that one year from now, 1-year Treasury bill rates will increase to 3.20 percent and that two years from now, 1-year Treasury bill rates will increase to 3.60 percent. If the unbiased expectations theory is correct, what should the current rate be on 3-year Treasury securities? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
2. A 2-year Treasury security currently earns 1.97 percent. Over the next two years, the real risk-free rate is expected to be 1.00 percent per year and the inflation premium is expected to be 0.60 percent per year. Calculate the maturity risk premium on the 2-year Treasury security. (Round your answer to 2 decimal places.)
3. Based on economists’ forecasts and analysis, 1-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:
R1 = 2.05%
E(2r1) = 2.95% L2 = 0.08%
E(3r1) = 3.35% L3 = 0.10%
E(4r1) = 3.80% L4 = 0.15%
Using the liquidity premium theory, plot the current yield curve. Make sure you label the axes on the graph and identify the four annual rates on the curve both on the axes and on the yield curve itself. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Year Current (Long-term) Rates
4. Rank from highest credit risk to lowest risk the following bonds, with the same time to maturity, by their yield to maturity: (Rank: 1 = highest, 4 = lowest)
Treasury bond with yield of 5.35 percent (Click to select)2413
IBM bond with yield of 7.69 percent (Click to select)3124
Trump Casino bond with yield of 8.96 percent (Click to select)4321
Banc One bond with a yield of 6.19 percent (Click to select)2341
5. A bond issued by IBM on December 1, 1996, is scheduled to mature on December 1, 2096. If today is December 2, 2011, what is this bond’s time to maturity? (Use 365 days a year.)
7. JP Morgan Chase Co. (JPM) has earnings per share of $3.39 and a P/E ratio of 11.62.
What is the price of the stock? (Round your answer to 2 decimal places.)
8. A preferred stock from Hecla Mining Co. (HLPRB) pays $4.10 in annual dividends..
If the required return on the preferred stock is 7.10 percent, what is the value of the stock? (Round your answer to 2 decimal places.)
9. You would like to buy shares of Sirius Satellite Radio (SIRI). The current ask and bid quotes are $4.18 and $4.15, respectively. You place a market buy order for 590 shares that executes at these quoted prices.
How much money did it cost to buy these shares? (Round your answer to 2 decimal places.)