Subject: Business / Finance
1?Which of the following statements is most correct?
Answera. If the maturity risk premium is zero, the yield curve must be flat.b. A 10-year corporate bond must have a higher yield than a 5-year Treasury bond.c. A 10-year Treasury bond must have a higher yield than a 5-year Treasury bond.d. If the Treasury yield curve is downward sloping, the yield curve for corporate bonds must also be downward sloping.2?Marshall Manufacturing has just borrowed money at 13.5% for 2 years. The pure rate ofinterest is 2%. Marshall’s default risk premium is 4%, its liquidity risk premium is 2%, andits maturity risk premium is .5%. Inflation is expected to be 3% during the first year of theloan’s life. What does the lender expect the inflation rate to be in the loan’s second year?
e. None of the statements above is correct.3?The 10-year bonds of Gator Corporation are yielding 8 percent per year.Treasury bonds with the same maturity are yielding 6.4 percent per year. The real risk-free rate (r*) has not changed in recent years and is 3 percent. The average inflation premium is 2.5 percent and the maturity risk premium takes the form: MP = 0.l%(t – l) where t = number of years to maturity. If the liquidity premium is 0.5 percent, what is the default risk premium on the corporate bond?