Question

- One way to estimate a corporate bond yield spread is to take the difference between a corporate bond yield and a treasury bond yield

- A stock with a beta coefficient of 1.0 means that the stock is a stock of average risk

- A simple link between expected inflation, nominal risk-free interest rate and real risk-free interest rate is that the nominal risk-free interest rate is equal to the sum of the real risk-free interest rate and the inflation premium

Answer 1

1: True: A yield spread is the difference in yield of an instrument compared to that of risk free rate; Since treasury bonds are considered risk free Corporate bond spread can be calculated in this manner

2: True: Beta represents systematic risk of a stock and the overall beta of the market=1; Hence if a stock has a beta value of 1 it means the stock moves aas per market movement and hence shows average systematic risk

3: True: As per Fischer equation, the approximate value of nomial interest rate is sum of real interest rate & inflation premium. But accurate model is shown below;

real interest rate =[(1+nominal int rate)/(1 +inflation premium)] -1