1 Q 47 Compute the expected return given these three economic states, their likelihoods, and the potential returns Economic State Probability Return Fast Growth 0 2 23 Slow Growth 0 6 14 Recession 0 2 30 A 3 5 percent B 7 0 percent C 7 5 percent D 12 5 percent 2 Q30 Liquidity Premium Hypothesis Suppose we observe the following rates 1 R 1 8 percent, 1 R 2 10 percent, and E ( 2 r 1 ) 8 percent If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L 2 A 1 02 percent B 4 04 percent C 6 15 percent D 12 03 percent 3 Q34 Comparing Bond Yields A client in the 35 percent marginal tax bracket is comparing a municipal bond that offers a 4 25 percent yield to maturity and a similar risk corporate bond that offers a 5 10 percent yield Which bond will give the client more profit after taxes A The municipal bond B The corporate bond C Both give the client equal profits after taxes D There is not enough information given to determine answer

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Question: 1. Q 47 Compute the expected return given these three economic states, their likelihoods, and the potential returns: Economic State Probability Return Fast Growth 0.2

Q 47

Compute the expected return given these three economic states, their likelihoods, and the potential returns:

Economic State Probability Return

Fast Growth 0.2 23%

Slow Growth 0.6 14%

Recession 0.2 -30%

A.		3.5 percent
B.		7.0 percent
C.		7.5 percent
D.		12.5 percent

Q30 Liquidity Premium Hypothesis Suppose we observe the following rates: ₁R ₁ = 8 percent, ₁R ₂ = 10 percent, and E( ₂r ₁) = 8 percent. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L₂?

		A .1.02 percent
		B. 4.04 percent
		C. 6.15 percent
		D .12.03 percent

Q34 Comparing Bond Yields A client in the 35 percent marginal tax bracket is comparing a municipal bond that offers a 4.25 percent yield to maturity and a similar-risk corporate bond that offers a 5.10 percent yield. Which bond will give the client more profit after taxes?

A.		The municipal bond.
B.		The corporate bond.
C.		Both give the client equal profits after taxes.
D.		There is not enough information given to determine answer.

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