Question Details

Is inflation expected to increase, decrease, or stay 


1.	Which of the following statements is CORRECT?

a.	The cash flows for an ordinary annuity all occur at the beginning of the periods.
b.	If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
c.	The cash flows for an annuity due must all occur at the beginning of the periods.
d.	The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.
e.	If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.
	

2.	You observed an upward-sloping normal yield curve. Which of following statement is the MOST correct?
	
a.	Pure expectation theory must be correct.
b.	There is a positive maturity risk premium.
c.	If the pure expectation theory is correct, future (short-term) rates are expected to be higher than current (short-term) rates.
d.	Inflation must be expected to change in the future.
e.	Default risk premium or liquidity premium must be increasing in the future. 

3.		Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2-year T-bond is 7.0%.  Assuming the
 pure expectations theory is correct, what is the market's forecast for 1-year rates 1 year from now?

a.	7.36%
b.	7.75%
c.	8.16%
d.	8.59%
e.	9.04%
 
4.	Assume a scenario in which there is no maturity risk premium (MRP = 0) and the real risk-free rate is expected to remain constant, and the yield curve is likely to be normal for the next 10 years. Is inflation expected to increase, decrease, or stay the same over the next 10 years?
	 
a.	Stay the same
b.	Decrease
c.	Increase
d.	Increase at first and then decrease
e.	None of above

5.	Crockett Corporation's 5-year bonds yield 6.65%, and 5-year T-bonds yield 4.75%.  The real risk-free rate is r* = 3.60%, the default risk premium for Crockett's bonds is DRP = 1.00% versus zero for T-bonds, the liquidity premium on Crockett's bonds is LP = 0.90% versus zero for T bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) × 0.1%, where t = number of years to maturity.  What inflation premium (IP) is built into 5-year bond yields?

a.	0.68%
b.	0.75%
c.	0.83%
d.	0.91%
e.	1.00%



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