Calculating interest rates The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next two years and 7% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t – 1)%, where t is the security’s maturity. The liquidity premium (LP) on all Pellegrini Southern Inc.’s bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium U.S. Treasury — AAA 0.60% AA 0.80% A 1.05% BBB 1.45%   Pellegrini Southern Inc. issues 15-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. a12.13%   b13.18%   c11.78%   d6.05%     Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? In theory, the yield on a bond with a longer maturity will be higher than the yield on a bond with a shorter maturity.   The yield on an AAA-rated bond will be higher than the yield on a BB-rated bond.

Q: Suppose the real risk-free rate is 2.80%, the average future inflation rate is 2.30%, a maturity…

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Q: The real risk-free rate is 3 percent.  Inflation is expected to be 3.5 percent this year, 5 percent…

A: Risk free rate = rf = 3%Inflation rate for year 1 = i1 = 3.5%Inflation rate for year 2 = i2 =…

Q: b. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a…

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Q: The real risk-free rate, r*, is 2.15%. Inflation is expected to average 1.65% a year for the next 4…

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Q: The real risk-free rate, r*, is 2.2%. Inflation is expected to average 2.7% a year for the next 4…

A: in this we have to calculate average inflation.

Q: The real risk-free rate, r*, is 1.3%. Inflation is expected to average 1.2% a year for the next 4…

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Q: Given the following data, find the expected rate of inflation during the next year. r real risk-free…

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Q: Assume that a 3-year Treasury security yields 3.40%. Also assume that the real risk-free rate (r")…

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Q: The 30-day T-bill yield is currently 3.10%. You also know that the inflation premium today is 1.80…

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Q: The risk free rate of interest is 2.0%. Inflation is expected to be 8.0% this year, 6.5% next year…

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Q: The real risk-free rate is 2.3%. Inflation is expected to be 2% this year, 4.4% next year, and 2.5%…

A: Yield on 7-year Treasury Note = Real Risk-free Rate + Inflation Premium + Maturity Risk Premium Real…

Q: An investor in Treasury securities expects inflation to be 2.4% in Year 1, 2.9% in Year 2, and 4.05%…

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A: Yield on AA-rated bonds is calculated as follows: Yield=Real risk free rate+Average Inflation…

Q: Suppose the real risk-free rate is 3.2%, the average future inflation rate is 1.9%, and a maturity…

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Q: The following data are gathered for: · The real risk-free rate is 1.25% · Inflation premium is…

A: Real risk free rate = 1.25% Inflation premium = 2.50% Default risk premium = 5% Liquidity premium =…

Q: The real risk - free rate is 1.85 % . Inflation is expected to be 2.85% this year, 4.15% next year,…

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Q: 5 year treasury notes are currently yielding 5.75%, and you have found the following interest…

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Q: Assume that the real risk free rate is 3% and the average annual expected inflation rate is 5%. The…

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Q: Suppose the inflation rate is expected to be 6.15% next year, 4% the following year, and 2%…

A: “Since you have posted a question with multiple sub-parts, we will solve first three subparts for…

Q: An investor in Treasury securities expects inflation to be 2.15% in Year 1, 2.9% in Year 2, and…

A: Maturity Risk Premium(MRP) is return expected by investor due to maturity period of security. It is…

Q: The risk free rate of interest is 2.0%. Inflation is expected to be 8.0% this year, 6.5% next year…

A: Risk structure of interest rate:  Because of changes in taxes, liquidity, information costs, and…

Q: The real risk-free rate, r*, is 1.4%. Inflation is expected to average 1.2% a year for the next 4…

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Q: The real risk-free rate is 1 percent. Inflation is expected to be 3.5 percent this year, 4.5 percent…

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Q: Calculating interest rates The real risk-free rate (r*) is 2.8% and is expected to remain constant.…

A: The objective of the first question is to calculate the yield on a fifteen-year, AA-rated bond…

Q: The real risk-free rate is 2.08%, inflation is expected to be 6.17% this year, and the maturity risk…

A: Real risk free rate = 2.08% Inflation rate = 6.17% Maturity risk premium = 0%

Q: The real rate of interest is 5,20% and inflation is expected to be 3,60% for the next three years. A…

A: Variables in the question:Real rate of interest=5.20%Inflation for the next 3 years=3.60%3 year…

Q: The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be…

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Q: Assume that the real interest rate is 2% per year, the default risk premium is 3%, the liquidity…

A: Given: Real interest rate = 2% Default risk premium = 3% Liquidity risk premium = 1%

Q: The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be…

A: Computation of the yield:Hence, the yield is 8.58%.

Interest Rate

When you deposit your money with the bank, the deposit earns you some extra money at the end of the specific period – something more than what you deposited. That amount of money that the bank pays you for keeping the money with the bank is the “interest” and the percentage at which the bank pays you for your amount is called the “interest rate”.