Keys Corporation’s 5-year bonds yield 5%, and 5-year T-bonds yield 3.7%. The real risk-free rate is r* =  1.7%, the inflation premium  for 5 years bonds is  IP = 1.6%, 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?

Assume the risk-free rate is 2% and that the required return on the market is 5.8%.   If a stock has a required rate of return of 6.1%, what is its beta?

Suppose the real risk-free rate is 3.2%,  the average future inflation rate is  1.9%, and a maturity premium of 0.05% per year to maturity applies, i.e., MRP =  0.05%(t), where t is the years to maturity.  What rate of return would you  expect on a 5-year Treasury security, assuming the pure expectations theory is NOT valid?

Drongo Corporation’s 4-year bonds currently yield 3.7 percent and have an inflation premium  of 1.1%.  The real risk-free rate of interest, r*, is 1.8 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 0.5 percent and are believed to be the same for all bonds issued by this company.  If the average inflation  rate is expected to be 6 percent for years 5 and 6, what is the yield on a 6-year bond for  Drongo Corporation?

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

T. Martell Inc.’s stock has a 39% chance of producing a 5% return, a  19% chance of producing a 6% return, and a 42% chance of producing a  -5% return. What is Martell’s expected return? 

You observe the following yield curve for Treasury securities: Maturity             Yield 1 Year                3.50% 2 Years              4.60% 3 Years              5.40% 4 Years              5.50% 5 Years              6.10% Assume that the pure expectations hypothesis holds.  What does the market expect will be  the yield on 4-year securities, 1 year from today?

Suppose you hold a diversified portfolio consisting of a $12,999 invested equally  in each of 5 different common stocks.  The portfolio’s beta is 0.88.  Now  suppose you decided to sell one of your stocks that has a beta of 1.4 and to  use the proceeds to buy a replacement stock with a beta of 0.7.  What would  the portfolio’s new beta be?

The real risk-free rate of interest is 2 percent.  Inflation is expected to be 3 percent this  coming year, jump to 5 percent next year, and increase to 6 percent the year after (Year 3).   According to the expectations theory, what should be the interest rate on 2-year, risk-free  securities today?

Suppose the real risk-free rate is 3.8%, the average future inflation rate is  2.3%, a maturity premium of 0.05% per year to maturity applies, i.e., MRP =  0.05%(t), where t is the years to maturity.  Suppose also that a liquidity premium  of 1% and a default risk premium of 0.5% applies to A-rated corporate bonds.   How much higher would the rate of return be on a 7-year A-rated corporate  bond than on a 5-year Treasury bond.  Here we assume that the pure  expectations theory is NOT valid.