None JSome characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbolsassociated with each characteristic:CharacteristicThis is the rate for a riskless security that is exposed to changes in inflation.It is based on the bond's marketability and trading frequency; the less frequently thesecurity is traded, the higher the premium added, thus increasing the interest rate.Over the past several years, Germany, Japan, and Switzerland have had lower interestrates than the United States due to lower values of this premium.This is the rate for a short-term riskless security when inflation is expected to be zero.This is the premium added as a compensation for the risk that an investor will not get paidin full.As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Becauseinterest rate changes are uncertain, this premium is added as a compensation for thisuncertainty.ComponentSymbolGrade It NowSave & ContinueContinue without saving

The several elements that go into making up the nominal interest rate are shown in the above table.…

Answered: J Some characteristics of the…

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter8: Relationships Among Inflation, Interest Rates, And Exchange Rates

Section: Chapter Questions

Problem 14QA

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Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic Symbol Component This is the rate for a short-term riskless security when inflation Maturity risk premium Inflation premium Liquidity risk premium is expected to be zero. It is calculated by adding the inflation premium to r* This is the difference between the interest rate on a U.S. Real risk-free rate Treasury bond and a corporate bond of the same profile-that Nominal risk-free rate is, the same maturity and marketability. Default risk premium This is the premium added to the risk-free rate that reflects the average sustained increase in the general level of prices for goods and services expected over the security's entire life. This is the premium that reflects the risk associated with changes in interest rates for a long-term security. This is the premium added to the equilibrium interest…
Which of the following statements concerning a global view of the bond market is correct? A. US dollar - denominated bonds distribute both interest and principal payments in euros. B. Foreign bonds, like junk bonds, have high default risk.C. Exchange rate fluctuations influence the returns eamed on foreign - pay bond holdings.D. The United States today accounts for about seventy-five percent of the available fixed-income securities worldwide.
Consider a state-space model for the securities market, with two dates, date 0 and 1, defined as follows: There are two economic states at date 1, state a and state b. The probability for state is 0.52, and the probability for state is 0.48. There is a risk-free bond traded in this market, with the date-1 payoff of $ 110.33, independent of the state. The date-0 price of the bond is $100. There is also a risky stock traded in the market. The date-I payoff of stock is $203.34 in state a and $72.55 in state b. The date-0 price of the stock is $100. Use the above to answer the following (A) - (D). What is the expected net rate of return on the bond? % unanswered
Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people's time preferences for consumption. This is the rate on a Treasury bill or a Treasury bond. This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. It is based on the bond's credit rating; the higher the rating, the lower the premium added, thus lowering the interest rate. It is based on the bond's marketability and trading frequency; the less frequently the security is traded, the higher the premium added, thus increasing the interest rate. As interest rates rise over time, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain over the life of the…
Consider a state space model. Suppose there are two economic states in the next year.The probability of occurrence of state 1 is 0.29 and the probability of occurrence of state 2 is 0.71. There is a risk-free bond traded in this market with the time 1 payoff of $100. The time 0 price of the bond is $89.71.All primitive state-contingent claims are traded in this market. (a) The time 0 price of the state-contingent claim paying off $1 in state 1 is. What is the price of, the state-contingent claim paying off $1 in state 2? (b) Suppose that there is another security traded in this market: a stock paying $50.0 in state 1, and $100.0 in state 2. What is the time 0 price of the stock? (c) What is the expected return on the risk-free bond (in %)? (d) What is the expected return on the stock? (e) What is the standard deviation of the return of the bond? (f) What is the standard deviation of the return of the stock?
Assume that interest rate parity holds and that 90-day risk-freesecurities yield a nominal annual rate of 3% in the United States and a nominal annual rateof 3.5% in the United Kingdom. In the spot market, 1 pound = $1.29.a. What is the 90-day forward rate?b. Is the 90-day forward rate trading at a premium or a discount relative to the spot rate?
Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic Component Symbol This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. It is based on the bond’s rating; the higher the rating, the lower the premium added, thus lowering the interest rate. It is calculated by adding the inflation premium to r*. It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people’s time preferences for consumption. As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty. This premium is added when a security lacks marketability,…
The market has an expected rate of return of 8.0 percent. The long-term government bond is expected to yield 4.8 percent and the U.S. Treasury bill is expected to yield 1.1 percent. The inflation rate is 3.2 percent. What is the market risk premium? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Which of the following is true about a bond's interest rate risk relative to its time-to-maturity? Multiple Choice A 10-year U.S. Treasury bond is not exposed to interest rate risk due to the "risk-free" nature of U.S. Treasury investments. Time-to-maturity and interest rate risk are directly correlated. The higher a bond's time-to-maturity, the less variation in the bond's value from potential changes in interest rates. All of the above.
A financial institution owns a portfolio of options dependent on the US Dollar Sterling exchange rate. The delta of the portfolio with respect to percentage changes in the exchange rate is 7.3. If the daily volatility of the exchange rate is 0.5% and a linear model is assumed, calculate the estimated 10-day 95% VaR for the portfolio.
Please solve these practice problems. An addition to problem 1,
1) Expectations of asset values by participants in financial markets 2) When market participants use all available information 3) Which of the following is NOT a way in which prices communicate information in the markets for bonds, stocks, foreign exchange, and financial instruments? 4) The gap between the yield on a corporate bond and the yield on a U.S. Treasury bond of the same maturity represents 5) If the interest rate on a ten-year bond issued by GM is 7.8% while the interest rate on a ten-year treasury bond is 4.6%, the risk premium is 6) If the dollar is expected to depreciate against the Japanese yen during the next 60 days, then 7) If the dollar is expected to depreciate against the British pound during the next 60 days, then 8) When the market price of a financial instrument equals its present value, savers and borrower can be sure that 9) If a company's sales begin to fall off so that it is now more likely to default on its bonds than financial markets had…

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