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9.
(TCO C) Crockett Corporation's five-year bonds yield 6.85%, and five-year T-bonds yield
4.75%. The real risk-free rate is r* = 2.80%, the default risk premium for Crockett's bonds is
DRP = 0.85% versus zero for T-bonds, the liquidity premium on Crockett's bonds is LP = 1.25%,
and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) x 0.1%,
where t = number of years to maturity. What is the inflation premium (IP) on five-year bonds?
(Points : 10)

1.40%

1.55%

1.71%

1.88%

2.06%
10.
(TCO C) Assume that to cool off the economy and decrease expectations for inflation, the
Federal Reserve tightened the money supply, causing an increase in the risk-free rate, rRF.
Investors also became concerned that the Fed's actions would lead to a recession, and that led
to an increase in the market risk premium, (rM - rRF). Under these conditions, with other things
held constant, which of the following statements is most correct?
(Points : 10)

The required return on all stocks would increase by the same amount.

The required return on all stocks would increase, but the increase would be greatest for
stocks with betas of less than 1.0.

Stocks' required returns would change, but so would expected returns, and the result
would be no change in stocks' prices.

The prices of all stocks would decline, but the decline would be greatest for high-
beta stocks.

The prices of all stocks would increase, but the increase would be greatest for high-beta
stocks.

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DeVry College of New York
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Great resource for chem class. Had all the past labs and assignments
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