1. The rate on 1-year Treasury notes is 5.50%, the rate on 10-year treasury bond
ID: 2793713 • Letter: 1
Question
1. The rate on 1-year Treasury notes is 5.50%, the rate on 10-year treasury bonds is 5.85%, and the rate on 10-year AAA rated corporate bonds is 6.60%. The approximate risk premium on the corporate bonds is
a. 0.35%.
b. 1.10%
c. 0.75%.
d. 1.45%.
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2. If inflation were to unexpectedly increase by 1%, then the rate on newly issued AA and BB corporate bonds would:
a. be approximately 8.0% and 9.4%.
b. also increase by approximately 1% each.
c. decrease since the risk-free rate no longer covers expected inflation.
d. none of the above.
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3. Preferred stockholders
a. are senior to bondholders.
b. are senior to common stockholders.
c. receive interest payments.
d. generally have “super” voting rights.
Explanation / Answer
Approximate risk premium on the corporate bonds= Return of 10 year Corporate bond-10 year treasury bond rate
Approximate risk premium on the corporate bonds= 6.60%-5.85%
Approximate risk premium on the corporate bonds= 0.75%
Answer C
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