Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 4, Problem 18P
Summary Introduction
To determine: The nominal interest rate.
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The real risk free rate is 2%. Inflation is expected to be 3% this year, 4% next year, and then 3.5% thereafter. The maturity risk premium is estimated to be 0.0005 x (t-1), where t=number of years to maturity. What is the nominal interest rate on a 7 year treasury security?
The real risk-free rate is 2%. Inflation is expected to be 3% this year, 4%next year, and then 3.5% thereafter. The maturity risk premium is estimatedto be 0.0005 3 (t 2 1), where t 5 number of years to maturity. What is thenominal interest rate on a 7-year Treasury security?
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Chapter 4 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 4 - Short-term interest rates are more volatile than...Ch. 4 - The rate of return on a bond held to its maturity...Ch. 4 - If you buy a callable bond and interest rates...Ch. 4 - A sinking fund can be set up in one of two ways....Ch. 4 - Prob. 1PCh. 4 - Prob. 2PCh. 4 - Current Yield for Annual Payments Heath Food...Ch. 4 - Determinant of Interest Rates
The real risk-free...Ch. 4 - Default Risk Premium A Treasury bond that matures...Ch. 4 - Prob. 6P
Ch. 4 - Bond Valuation with Semiannual Payments
Renfro...Ch. 4 - Prob. 8PCh. 4 - Bond Valuation and Interest Rate Risk The Garraty...Ch. 4 - Prob. 10PCh. 4 - Prob. 11PCh. 4 - Bond Yields and Rates of Return A 10-year, 12%...Ch. 4 - Yield to Maturity and Current Yield You just...Ch. 4 - Current Yield with Semiannual Payments
A bond that...Ch. 4 - Prob. 15PCh. 4 - Interest Rate Sensitivity
A bond trader purchased...Ch. 4 - Bond Value as Maturity Approaches An investor has...Ch. 4 - Prob. 18PCh. 4 - Prob. 19PCh. 4 - Prob. 20PCh. 4 - Bond Valuation and Changes in Maturity and...Ch. 4 - Yield to Maturity and Yield to Call
Arnot...Ch. 4 - Prob. 23PCh. 4 - Prob. 1MCCh. 4 - Prob. 2MCCh. 4 - How does one determine the value of any asset...Ch. 4 - Prob. 4MCCh. 4 - What would be the value of the bond described in...Ch. 4 - Suppose a 10-year, 10% semiannual coupon bond with...Ch. 4 - Prob. 9MCCh. 4 - Prob. 10MCCh. 4 - Prob. 11MCCh. 4 - Prob. 12MCCh. 4 - Prob. 14MCCh. 4 - Prob. 15MCCh. 4 - Prob. 16MCCh. 4 - Prob. 17MC
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- EXPECTATIONS THEORY Assume that the real risk-free rate is 2% and that the risk premium is zero. If a 1-year Treasury bond yield is 5% and a 2-year Treasury bond yields 7%, what is the 1-year interest rate that is expected for Year 2? Calculate this yield using a geometric average. What inflation rate is expected during Year 2? Comment on why the average interest rate during the 2-year period differs from the 1-year interest rate expected for Year 2. 6-15 maturityarrow_forwardThe real risk-free rate of interest is 4.5%. Inflation is expected to be 4% in the upcoming year and 6% for each of the next 3 years. Assume that the maturity risk premium (MRP) is zero. What is the yield on a 4-year Treasury security? Question 3Answer a. 6.00% b. 10.00% c. 4.50% d. 5.50%arrow_forward7. Calculating interest rates The real risk-free rate (r*) is 2.80% and is expected to remain constant into the future. Inflation is expected to be 4.05% per year for each of the next three years and 2.85% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.10 x (t - 1)%, where t is the security's maturity. The liquidity premium (LP) on all Gauge Imports Inc.'s bonds is 1.20%. 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% Gauge Imports Inc. issues nine-year, AA-rated bonds. What is the yield on one of these bonds? (Hint: Disregard cross-product terms; that is, if averaging is required, use an arithmetic average.) 7.65% 8.85% 5.60% 8.05% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? The yield on U.S. Treasury securities always…arrow_forward
- Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.25%, and a maturity premium of 0.10% per year to maturity applies, i.e., MRP = 0.10. What rate of return would you expect on a 1-year (short term) Treasury security?arrow_forwardThe real risk-free rate is 3 percent. Inflation is expected to be 3.5 percent this year, 5 percent next year, and 6 percent thereafter. The maturity risk premium is estimated to be 0.11 ´ (t - 1)%, where t is the number of years to maturity. What is the yield on a 7-year Treasury note? a. 9.66% b. 8.50% c. 0.77% d. 9.16% e. 7.16%arrow_forwardSuppose the real risk-free rate of interest is r*=4%�*=4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per year for the next two years and 3.90% per year for the next three years. The maturity risk premium is 0.1×(t−1)%0.1×�−1%, where t� is number of years to maturity, a liquidity premium is 0.45%, and the default risk premium for a corporate bond is 1.40%. The average inflation during the first 4 years is2.37% . What is the yield on a 4-year Treasury bond? 4.30% 8.90% 6.75% 7.05% What is the yield on a 4-year BBB-rated bond? 8.90% 7.50% 7.05% 8.45% If the yield on a 5–year Treasury bond is 7.38% and the yield on a 6–year Treasury bond is 7.83%, the expected inflation in 6 years is . (Hint: Do not round intermediate calculations.)arrow_forward
- Please help me with this question thanks ....arrow_forwardThe real risk-free rate is 1 percent. Inflation is expected to be 3.5 percent this year, 4.5 percent next year, and 5.5 percent thereafter. The maturity risk premium is estimated to be 0.08 ´ (t - 1)%, where t is the number of years to maturity. What is the yield on a 9-year Treasury note?arrow_forward1 . Calculating interest rates The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 4% per year for each of the next five years and 3% 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 Harrington Horticulture Co.’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% Harrington Horticulture Co. 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. a. 8.33% b. 6.05% c. 7.98% d. 9.38% Based on your understanding of the determinants of interest rates, if everything else remains…arrow_forward
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