According to liquidity premium theory

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Reference no: EM131973553

1. A one-year discount bond issued by X has a payout of $550 and today's price is $510. A one-year discount bond issued by Y has a payout of $2,290 and today's price is $2,055. Then the bond issued by X has a ____ yield than the bond issued by Y, and this could be because Y has a ____ default risk.

higher; lower

lower; lower

lower; higher

higher; higher

2. Suppose there is a large increase in the liquidity of U.S. Treasury bonds, relative to corporate bonds. In this case, the demand curve for U.S. T bonds will shift to the ____ and the ____ curve for Corporate bonds will shift to the left.

left; demand

right; demand

left; supply

right; supply

3. Suppose that the default risk of corporate bonds increases due to a downturn in the economy. As a result, we would expect the equilibrium price on the corporate bonds to ____ and the yield on the corporate bonds to ____ .

increase; decrease

decrease; increase

increase; increase

decrease; decrease

4. Analysts predict that short-term interest rates over the next 4 years will be as follows: 3%, 12%, 7%, and 10%, respectively. According to expectations theory, the yield on a discount bond with a three year maturity will be ____ and yield on bond with a four year maturity will be ____.

7.33%; 8%

4%; 8%

7.33%; 3.25%

4%; 3.25%

5. Consider the same short-term interest rates as in problem 4 above. If the yield on a discount bond that matures in 4 years is 9.25%, then according to liquidity premium theory, the premium attached to the 4 year discount bond is

1.25%

1.5%

1.75%

Reference no: EM131973553

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