Question

14.Suppose that the current rate on 10-year Treasury bonds is 3.32%, on 20-year Treasury bonds is 4.08%, and on a 20-year corporate bond is 6.92%. Assume that the maturity risk premium on 10-year corporate bonds is 0.35% and on 20-year corporate bonds it is 0.75%. If the default risk premium and liquidity risk premium on a 10-year corporate bond is the same as that on the 20-year corporate bond, what isthe current rate on a 10-year corporate bond?

A. morethan 6.45 percent

B. lessthan 6.45 percentbut more than 6.20percent

C. lessthan 6.20percentbut more than 5.95percent

D. lessthan 5.95percentbut more than 5.70percent

E. less than 5.70

15.Which of the following statements is (are) correct?(x)The rate on a 10-year corporate bond will be more than the rate on a 10-year Treasurybond because the corporate bond will have default risk but the Treasury bond will not(y)Although the rate on a 3-year Treasury bond can morethan the rate on a 15-year Treasurybond, the rate on a 3-year Treasury bond will never be more than the rate ona 3-year corporate bond.(z)If the yield curve is downward sloping, then the yield to maturity on a 10-year corporate bond from Acme Tools Inc. is less than the yield to maturity on a 20-year corporate bond from Acme Tools, Inc.A.(x), (y) and (z)B. (x) and (y) onlyC.(x) and (z) onlyD.(y) and (z) onlyE.(x) only

Answer 1

rate on 10 year corporate bond = 3.32% + 0.35 + (6.92 - 4.08)%

rate on 10 year corporate bond = 6.54%

A. morethan 6.45 percent

15. x and y are correct