1. An investment-grade bond Is considered: a. speculative b. high-yield c. both
ID: 2383244 • Letter: 1
Question
1. An investment-grade bond Is considered: a. speculative b. high-yield c. both of the above d. None of the above 2. A Treasury security that matures in 9 years yields 8%. A corporate bond that matures in 9 years yields 10.4%. If the liquidity premium on the corporate bond is 60 bps, what is the default risk premium? Assume the expectations theory does NOT hold. a. 0.9% b. 10.4% c.1.8% d.2.4% e. 9.0% 3. The New York Stock Exchange is a: a. primary market b. secondary market c. private market d. NONE of the above 4. The Fed buys Treasuries when it wants to decrease the money supply. a. True b. False. 5. A keynesian is most concerned with: a. low unemployment b. Low inflation 6. The period between the onset of a problem and the perception that the problem exists is referred to as : a. latency b. recognition lag c. incubation d. impact lapExplanation / Answer
(1) None of the given options is correct.
(2) Difference in yield between same maturity treasury security & corporate bond has 2 risk components: Liquidity risk & Default risk.
The yield difference = 10.4% - 8% = 2.4% (= 240 bps)
Out of this 240 bps, 60 bps is liquidity risk. So, default risk premium = 180 bps, or 1.8%
Correct option (c)
(3) Correct option (b)
(4) FALSE.
When Fed wants to decrease money supply, it sells treasury bonds.
(5) Option (a)
(6) Option (b)
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