You are given the information below concerning expected real rates and expected inflation rates or each of the next five years. Assume that you wish to buy a 3-year, zero coupon security that you will hold over Years 3, 4, and 5, and which will mature for $1,000 at the end of Year 5. Also assume that the maturity risk premium (MRP) can be defined as equal to (0.15%)*(t-1), where t is equal to the number of years until Maturity. Based on this information, determine how much you expect to pay for this 3-year, zero coupon security when you purchase it in 2 years. (Hint: determine the 3-year nominal rate for Years 3-5 and then add the MRP.) Year K* Average K* Inflation Average IP Kn Kf 12.00% 2.00% 6.00% 6.00% 8.00% 8.00% 22.00% 2.00% 5.00% 5.50% 7.50% 7.00% 3 2.00% 2.00% 4.00% 5.00% 7.00% 6.00% 43.00% 2.25% 3.00% 4.50% 6.75% 6.00% 5 3.00% 2.40% 3.00% 4.20% 6.60% 6.00%
You are given the information below concerning expected real rates and expected inflation rates or each of the next five years. Assume that you wish to buy a 3-year, zero coupon security that you will hold over Years 3, 4, and 5, and which will mature for $1,000 at the end of Year 5. Also assume that the maturity risk premium (MRP) can be defined as equal to (0.15%)*(t-1), where t is equal to the number of years until Maturity. Based on this information, determine how much you expect to pay for this 3-year, zero coupon security when you purchase it in 2 years. (Hint: determine the 3-year nominal rate for Years 3-5 and then add the MRP.) Year K* Average K* Inflation Average IP Kn Kf 12.00% 2.00% 6.00% 6.00% 8.00% 8.00% 22.00% 2.00% 5.00% 5.50% 7.50% 7.00% 3 2.00% 2.00% 4.00% 5.00% 7.00% 6.00% 43.00% 2.25% 3.00% 4.50% 6.75% 6.00% 5 3.00% 2.40% 3.00% 4.20% 6.60% 6.00%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:You are given the information below concerning expected real rates and expected inflation rates or each
of the next five years. Assume that you wish to buy a 3-year, zero coupon security that you will hold over
Years 3, 4, and 5, and which will mature for $1,000 at the end of Year 5. Also assume that the maturity
risk premium (MRP) can be defined as equal to (0.15%)*(t-1), where t is equal to the number of years until
Maturity. Based on this information, determine how much you expect to pay for this 3-year, zero coupon
security when you purchase it in 2 years. (Hint: determine the 3-year nominal rate for Years 3-5 and then
add the MRP.)
Year K* Average K* Inflation Average IP Kn Kf
12.00% 2.00% 6.00% 6.00% 8.00% 8.00%
22.00% 2.00% 5.00% 5.50% 7.50% 7.00%
3 2.00% 2.00% 4.00% 5.00% 7.00% 6.00%
43.00% 2.25% 3.00% 4.50% 6.75% 6.00%
5 3.00% 2.40% 3.00% 4.20% 6.60% 6.00%
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