Interest Rates on 1-Year, 2-Year, and 3-Year Treasury Bills Are

question 4

Multiple Choice

Interest rates on 1-year, 2-year, and 3-year Treasury bills are 5%, 6%, and 7% respectively. Assume that the pure expectations theory holds and that the market is in equilibrium. Which of the following statements is correct?

• A) The maturity risk premium is positive.
• B) Interest rates are expected to fall over the next two years.
• C) The market expects one-year rates to be 7% one year from today.
• D) The default risk premium is highest for Year 2.
• E) The liquidity risk premium is highest for Year 1.

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Definitions:

Property Plant Equipment

Long-term tangible assets held for business use and not expected to be converted into cash in the current or upcoming fiscal year, including land, buildings, machinery, and vehicles.

Free Cash Flow

The amount of cash generated by a business after accounting for capital expenditures needed to maintain or expand the asset base.

Common Stock

A type of security that represents ownership in a corporation, entitling the shareholder to a proportion of the corporation's assets and profits.

Depreciation

The systematic allocation of the cost of an asset over its useful life.