Which of the following equations is NOT correct? Quoted rate = quota risk-free rate + default risk...

Question

Question

Which of the following equations is NOT correct?
1. Quoted rate = quota risk-free rate + default risk premium + liquidity premium + maturity risk premium
2. Quoted interest rate minus real risk-free rate = Inflation premium
3. Maturity risk premium + marketability premium = Nominal rate minus quoted risk-free rate
4. Maturity risk premium + marketability premium + default risk premium = Nominal rate minus quoted risk-free rate

You are the chief financial officer (CFO) of a regional bank in New Orleans. As you look at the balance sheet of your bank, you worry about the risk that the borrowers of funds from your bank will default on their loans (i.e. not make scheduled interest or principal payments). Which of the following conditions would increase your worry about the size of the average default risk premium?
1. When the liquidity risk premium is equal to the expected inflation rate
2. When the economy is growing weaker
3. When the economy is not showing signs of weakness
4. When there the treasury bill rate in declining over time

Answer 1

Answer #1

1.
Option C
Maturity risk premium + marketability premium = Nominal rate minus quoted risk-free rate

2.
When the economy is growing weaker

Answer 2

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