al. A one year Treasury Bill offers a yield of 13 per cent. You anticipate 6 per

Question

al. A one year Treasury Bill offers a yield of 13 per cent. You anticipate 6 per cent rate nflation. The tax rate is zero. What is your target real return? a. Not more than 3 per cent. b. More than 3 per cent, but not more than 6 per cent. C. More than 6 per cent, but not more than 9 per cent d. More than 9 per cent. 22. Why did the federal go Group]? a. AIG purchased loans of dubious quality from Penn Square. b. AIG sold large volumes of credit default swaps without adequate reserves or internal controls. C. AIG created large volumes of subprime mortgages, lending to individuals with low prospects of repayment d. AlG assigned overly optimistic ratings to collateralized debt obligations 23. You want to buy a one year Treasury Bill with $ 100 par value. You anticipate 6 per cent inflation. You also want a 6 per cent real return after taxes. The tax rate is 25 per cent. How much should you pay for this Bill? a. Not more than $ 85.50 b. More than $ 85.50, but not more than $ 86.50 c. More than $ 86.50, but not more than $ 87.50 d. More than $87.50 24. You have purchased 3 stripped Treasury securities. The maturities are 5,7, and 9 years; the yield to maturity is 7 per cent for all 3 maturities and each will pay $ 100 at maturity. What is the duration of your portfolio? a. Not more than 6.8 years. b. More than 6.8 years, but not more than 6.85 years. c. More than 6.85 years, but not more than 6.9 years. d. More than 6.9 years. 25. You are offered two bonds with the same yield to maturity and the same duration.One as greater convexity. How does convexity affect price volatility? a. Greater convexity magnifies bond price decreases and attenuates bond price increases. b. Greater convexity magnifies bond price increases and attenuates bond price decreases. c. Greater convexity always means large changes in bond prices. d. Greater convexity always means smaller changes in bond prices. Page 5 of 10

Explanation / Answer

21. C.More than 6 percent but not more than 9 percent. Explantion: When inflation increases the bond yield curves droops. Hence inflation reduces the effective yield of bond followed by tax.since tax is zero only efffect of inflation is pronounced.

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