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1.The expected annual inflation rates for the coming 5 years are listed in the following table:

Year	Expected annual inflation rate
1	4%
2	2
3	2
4	1
5	1

The real risk-free rate for a five-year debt security is 1%.

2.The current yield for a five-year Treasury note is 5%. Assume that the liquidity premium for the security is 0%, what is the maturity risk premium of the security?

Select one:

a. 3.5%

b. 3%

c. 2.5%

d. 2%

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The correct answer is: 2%

3.Two years ago you bought a bond at $975. At the time of the purchase, the bond had a coupon rate of 8% paid semi-annually, a par value of $1,000, and a maturity of 10 years. If you sell the bond at the current price of 1,050, what is your realized rate of return from this investment?

Select one:

a. 11%

b. 12.53%

c. 12.10%

d. 11.73%

e. 10%

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The correct answer is: 11.73%

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Question text

For the following bond,

Par value: 1,000

Coupon rate: 8% paid annually

Time to maturity: 3 years

Interest rate: 6%

What is the modified duration?

Select one:

a. 1.7834 years

b. 3.1808 years

c. 2.1555 years

d. 2.6313 years

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The correct answer is: 2.6313 years

3.Company A, a lower-rated firm, has access to floating-rate funds at a margin of 1.2% over LIBOR and fixed-rate funds at 10%. In contrast, company B, a higher-rated firm, has access to fixed-rate funds at 8%. Both companies enter into an interest rate swap with Bank C. Based on the swap, Bank C would gain 0.3% and each of the two companies would gain 0.6%. What is the current floating rate available for Company B?

Select one:

a. LIBOR+1.1%

b. LIBOR+.7%

c. LIBOR+.3%

d. LIBOR+1.4%

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The correct answer is: LIBOR+.7%