The Following Premiums Apply to a 6-Month Bond: Interest Rate

question 26

Multiple Choice

The following premiums apply to a 6-month bond: interest rate risk premium = 0.22 percent; real rate = 3.50 percent; default premium = 0.12 percent; inflation premium = 1.45 percent.What is the expected difference in nominal interest rates between a 6-month risky security and a 6-month,default-free security?

• A) 0.12 percent
• B) 0.34 percent
• C) 0.37 percent
• D) 1.57 percent
• E) 1.60 percent

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Definitions:

Equity Method

An accounting technique used by firms to assess the profits earned by their investments in other companies, where the investment income is proportional to their ownership share.

Management's Intent

The plans and objectives that company management has regarding future operations, investments, or actions, which can affect financial reporting and decision-making.

Financial Statements

Documents summarizing a corporation's financial status, encompassing the balance sheet, income statement, and statement of cash flows.

Comparability

The ability to use accounting information to compare the financial performances of different entities.