Questions:

1. You are estimating the required rate of return for a particular investment. Which of the following premiums are you least likely to consider?

A. Inflation premium

B. Maturity premium

C. Nominal premium

2. A three-year CD offers a stated annual interest rate of 10 percent compounded quarterly. Given an initial investment of $80,000, which of the following is *most likely* to be the value of the CD at maturity?

A. $86,151

B. $86,628

C. $107,591

3. Given below is information about a security whose nominal interest rate is 15%:

- The real risk free rate of return is 3.5%
- The default risk premium is 3%
- The maturity risk premium 4%
- The liquidity risk premium is 2%

An investor wants to determine the inflation premium in the security’s return. The inflation premium is *closest* to:

- 2.5%.
- 4.0%.
- 9.0%.

Tomorrow’s questions will be on the topic of R06 Discounted Cash Flow Applications.