# Question: 1 if a company experiences a decrease in their credit...

###### Question details

**1. If a company experiences a decrease in their credit
rating, what is the likely effect on the yield on their long term
bonds?**

A. The yield will decrease due to the maturity risk premium

B. The yield will increase due to the maturity risk premium

C. The yield will decrease due to the default risk premium

D. The yield will increase due to the default risk premium

**2. Suppose that the real risk-free rate of interest is
2%. Inflation is expected to be 5% this year and 3% thereafter. The
maturity risk premium is 0.2%(t-1), where t is the number of years
until maturity. The default risk premium is 2.5%. The liquidity
premium is 0%. What is the nominal interest rate on a 4-year
bond?**

A. 19.1%

B. 8.1%

C. 8.6%

D. 5.8%

**3. What will happen to a yield curve if there is an
increase in the real risk free rate of interest?**

A. The yield curve slope will increase

B. The yield curve will shift down

C. The yield curve will shift up

D. The yield curve slope will decrease