FIN 515 Devry entire course DEVRY FIN 515 Week 4 Midterm | Page 5

1.20% versus zero for T-bonds, 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 liquidity premium (LP) on Niendorf’s bonds? (Points : 10)
0.49%
0.55%
0.61%
0.68%
0.75%
(10 ) (TCO C) Assume that investors have recently become more risk averse, so the
market risk premium has increased. Also, assume that the risk-free rate and
expected inflation have not changed. Which of the following is most likely to occur?
(Points : 10)
(a) The required rate of return for an average stock will increase by an amount equal
to the increase in the market risk premium.
(b) The required rate of return will decline for stocks whose betas are less than 1.0.
(c) The required rate of return on the market, rM, will not change as a result of these
changes.
(d) The required rate of return for each individual stock in the market will increase
by an amount equal to the increase in the market risk premium.
(e) The required rate of return on a riskless bond will decline.