Assume Investors Demand a Real Rate of Return Equal to 3

question 42

Multiple Choice

Assume investors demand a real rate of return equal to 3 percent and that there is no maturity risk premium associated with Treasury securities.According to the Wall Street Journal,the average nominal yields on risk-free Treasury securities with different maturities are:
Type of security
Yield1-year
4) 5%2-year
4) 63-year
4) 84-year
5) 0What is the one-year nominal interest rate and the inflation premium that is expected in Year 4?

• A) 5.0%;2.0%
• B) 4.5%;1.5%
• C) 3.0%;1.8%
• D) 5.6%;2.6%
• E) There is not enough information to answer this question.

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Definitions:

Cash Flows From Operations

The net amount of cash generated or used by a company in its operational activities during a specific period.

Deferred Income Taxes

Represents taxes that are owed but not yet paid, due to differences in the timing of recognition of revenue and expenses for tax reporting and financial accounting purposes.

Income Taxes Payable

The sum of income tax that a company is liable to the government but remains unpaid.

Income Tax Expense

The total amount of income tax that a company expects to pay in a given fiscal period, appearing on the income statement.