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31.  The real risk-free rate of interest, k*, is expected to remain constant at 3 percent.  Inflation is expected to be 3 percent for next year and then 2 percent a year thereafter.  The maturity risk premium is zero. Given this information, which of the following statements is most correct?

a.The yield curve for U.S. Treasury securities is downward sloping.

b.A 5-year corporate bond has a higher yield than a 5-year Treasury security.

c.A 5-year corporate bond has a higher yield than a 7-year Treasury security.

d.All of the statements above are correct.  *

32.Which of the following statements is most correct?

a.If companies have fewer productive opportunities, interest rates are likely to increase.

b.If individuals increase their savings rate, interest rates are likely to increase.

c.If expected inflation increases, interest rates are likely to increase.  *

d.All of the statements above are correct.

33.  Given the following data, find the expected rate of inflation during the next year.

k* = real risk-free rate = 3%.

Maturity risk premium on 10-year T-bonds = 2%.  It is zero on 1-year bonds, and a linear relationship exists.

Default risk premium on 10-year, A-rated bonds = 1.5%.

Liquidity premium = 0%.

Going interest rate on 1-year T-bonds = 8.5%.

a.3.5%

b.4.5%

c.5.5%    *

d.6.5%

34.  One-year government bonds yield 3 percent and 2-year government bonds yield 4 percent. Assume that the expectations theory holds.  What does the market believe the rate on 1-year government bonds will be one year from today?

a.5.00%   *

b.5.50%

c.3.75%

d.4.00%

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