Table 51 Table 51 Shows the Interest Rates for Treasury Securities of Different

question 9

Multiple Choice

Table 5.1
$$\begin{array} { | c | c | r | } \hline 1 \text { year } & 2 \text { years } & 3 \text { years } \\\hline 1.50 \% & 2.25 \% & 3.25 \% \\\hline\end{array}$$
Table 5.1 shows the interest rates for Treasury securities of different maturities. Assume that the liquidity premium theory is correct.
-Refer to Table 5.1 On this day,what did investors expect the interest rate to be on the one-year Treasury bill in two years if the term premium on a two-year Treasury note is 0.25% and the term premium on a three-year Treasury note is 0.75%?

• A) 2.375%
• B) 3.25%
• C) 3.50%
• D) 4.75%

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Definitions:

Equity Financing

The process of raising capital through the sale of shares in a company to investors.

Du Pont Identity

A formula that breaks down Return on Equity (ROE) into three component parts: profit margin, asset turnover, and financial leverage, to analyze a company’s financial performance.

Profit Margin

A fiscal indicator calculating the proportion of income left once total costs are subtracted from revenues.

Equity Multiplier

A financial ratio indicating the proportion of a company's assets that are financed by stockholder's equity.