T. Martell Inc.’s stock has a 40% chance of producing a 12% return, a  36% chance of producing a 5% return, and a 24% chance of producing a  -9% return. What is Martell’s expected return? 

Drongo Corporation’s 3-year bonds currently yield 5.8 percent and have an inflation premium  of 2%.  The real risk-free rate of interest, r*, is 3 percent and is assumed to be constant.   The maturity risk premium (MRP) is estimated to be 0.1%(t – 1), where t is equal to the time to  maturity.  The default risk and liquidity premiums for this company’s bonds total 0.6 percent and are believed to be the same for all bonds issued by this company.  If the average inflation  rate is expected to be 2.8 percent for years 4, 5, and 6, what is the yield on a 6-year bond for  Drongo Corporation?

One-year Treasury securities yield 6.6%, 2-year Treasury securities yield 5.9%,  and 3-year Treasury securities yield 6.1%. Assume that the expectations theory  holds. What does the market expect will be the yield on 1-year Treasury  securities one year from now?

T. Martell Inc.’s stock has a 36% chance of producing a 15% return, a  22% chance of producing a 10% return, and a 42% chance of producing a  -12% return. What is Martell’s expected return? 

You observe the following yield curve for Treasury securities: Maturity             Yield 1 Year                2.00% 2 Years              3.30% 3 Years              4.10% 4 Years              4.60% 5 Years              6.60% Assume that the pure expectations hypothesis holds.  What does the market expect will be  the yield on 3-year securities, 2 year from today?

The risk-free rate is 3.3 percent.  Stock A has a beta = 2 and Stock B has a beta = 1. Stock A has a required return of 9.2 percent.  What is Stock B’s required return?

Keys Corporation’s 5-year bonds yield 6%, and 5-year T-bonds yield 4%. The real risk-free rate is r* =  2.2%, the inflation premium  for 5 years bonds is  IP = 1.4%, the default risk premium for Keys’ bonds is DRP = 0.44% 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  is the liquidity premium (LP) on Keys’ bonds?

Given the following data, find the expected rate of inflation during the next year. ·         r* = real risk-free rate = 2.00%. ·         Maturity risk premium on 10-year T-bonds = 2%.  It is zero on 1-year bonds, and a linear relationship exists. ·         Default risk premium on 10-year, A-rated bonds = 1.5%. ·         Liquidity premium = 0%. ·         Going interest rate on 1-year T-bonds = 5.00%.

Which of the following events would NOT lead to an increase in interest rates? 

T. Martell Inc.’s stock has a 36% chance of producing a 15% return, a  22% chance of producing a 10% return, and a 42% chance of producing a  -12% return. What is Martell’s expected return?