Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 5, Problem 23P
a)
Summary Introduction
To determine: The interest rate on 1-, 2-, 3-, 4-, 5-, 10-, and 20-year Treasury securities and then plot the yield curve.
b)
Summary Introduction
To determine: Plot the yield curve of Company E on the same graph with Treasury bond yield curve.
c)
Summary Introduction
To determine: Plot the yield curve of Company L.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Suppose you and most other investors expect the inflation rate to be 7%next year, to fall to 5% during the following year, and then to remain ata rate of 3% thereafter. Assume that the real risk-free rate, r*, will remainat 2% and that maturity risk premiums on Treasury securities rise fromzero on very short-term securities (those that mature in a few days) to alevel of 0.2 percentage points for 1-year securities. Furthermore, maturityrisk premiums increase 0.2 percentage points for each year to maturity, upto a limit of 1.0 percentage point on 5-year or longer-term T-notes andT-bonds.a. Calculate the interest rate on 1-, 2-, 3-, 4-, 5-, 10-, and 20-year Treasurysecurities, and plot the yield curve.
Suppose the inflation rate is expected to be 6.75% next year, 4.3% the following year, and 2.3% thereafter. Assume that the real risk-free rate, r*, will remain at 1.85% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds.
Calculate the interest rate on 3-year Treasury securities.
The real risk-free rate is 2.50%. Inflation is expected to be 1.75% this year and 3.75% during the next 2 years. Assume that the maturity risk premium is zero.
What is the yield on 2-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places.
What is the yield on 3-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places.
Chapter 5 Solutions
Financial Management: Theory & Practice
Ch. 5 - Short-term interest rates are more volatile than...Ch. 5 - The rate of return on a bond held to its maturity...Ch. 5 - If you buy a callable bond and interest rates...Ch. 5 - A sinking fund can be set up in one of two ways....Ch. 5 - Prob. 1PCh. 5 - Wilson Corporations bonds have 12 years remaining...Ch. 5 - Prob. 3PCh. 5 - The real risk-free rate of interest is 4%....Ch. 5 - A Treasury bond that matures in 10 years has a...Ch. 5 - The real risk-free rate is 3%, and inflation is...
Ch. 5 - Renfro Rentals has issued bonds that have a 10%...Ch. 5 - Thatcher Corporations bonds will mature in 10...Ch. 5 - The Garraty Company has two bond issues...Ch. 5 - Prob. 10PCh. 5 - Goodwynn & Wolf Incorporated (G&W) issued a bond 7...Ch. 5 - Prob. 12PCh. 5 - You just purchased a bond that matures in 5 years....Ch. 5 - A bond that matures in 7 years sells for 1,020....Ch. 5 - Prob. 15PCh. 5 - A bond trader purchased each of the following...Ch. 5 - An investor has two bonds in his portfolio. Each...Ch. 5 - The real risk-free rate is 2%. Inflation is...Ch. 5 - Prob. 19PCh. 5 - Prob. 20PCh. 5 - Suppose Hillard Manufacturing sold an issue of...Ch. 5 - Arnot International’s bonds have a current market...Ch. 5 - Prob. 23PCh. 5 - Prob. 24SPCh. 5 - Prob. 1MCCh. 5 - Prob. 2MCCh. 5 - Prob. 3MCCh. 5 - How is the value of a bond determined? What is the...Ch. 5 - What would be the value of the bond described in...Ch. 5 - Suppose a 10-year, 10% semiannual coupon bond with...Ch. 5 - Write a general expression for the yield on any...Ch. 5 - Define the real risk-free rate (r). What security...Ch. 5 - Prob. 11MCCh. 5 - Prob. 12MCCh. 5 - Prob. 14MCCh. 5 - How are interest rate risk and reinvestment rate...Ch. 5 - What is the term structure of interest rates? What...Ch. 5 - Briefly describe bankruptcy law. If a firm were to...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- An investor in Treasury securities expects inflation to be 2.1% in Year 1, 3.0% in Year 2, and 4.25% each year thereafter. Assume that the real risk-free rate is 2.25% and that this rate will remain constant. Three-year Treasury securities yield 5.20%, while 5-year Treasury securities yield 6.00%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is MRP5 - MRP3? Do not round intermediate calculations. Round your answer to two decimal places.arrow_forwardSuppose the real risk-free rate of interest is r=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 x (t-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 is What is the yield on a 4-year Treasury bond? O 6.75% O 8.90% O 4.30% O 7.05% What is the yield on a 4-year BBB-rated bond? O 7.50% O 7.05 % O 8.45% 8.90% 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_forwardThe real risk-free rate is 2% which is projected to be constant indefinitely. The expected inflation for year 1 is 1%, for year 2 is 2%, and it will increase by 1% each year after. Liquidity Premium is 1% and the default risk premium is 2.5%. Maturity Risk premium for long-term securities is computed as estimated to be 0.5%(t - 1), where the variable “t” is an independent variable that shows the years of maturity of the bond. How much is the difference between the nominal rate of a 7-year long-term government issued bond and 7-year long-term corporate issued bond? a. 3.5% b. 1.5% c. 3.3% d. 5.5%arrow_forward
- The real risk-free rate is 4.19%. Inflation is expected to be 2.1% this year and 4.75% during the next 4 years. Assume that the maturity risk premium is zero. What is the yield on 4-year treasury securities? State your answer as a percentage to 2 decimal places. Do not include the % symbol.arrow_forwardThe real risk-free rate is 3.05%, inflation is expected to be 2.75% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, what is the equilibrium rate of return on a 1-year Treasury bond?arrow_forwardSuppose the real risk-free rate is 3.00%, the average expected future inflation rate is 4.00%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Include the cross-product term, i.e., if averaging is required, use the geometric average. (Round your final answer to 2 decimal places.)arrow_forward
- An investor in Treasury securities expects inflation to be 14,25% in Year 1, 12,20% in Year 2, 9,60%. in Year 3 and 8,00% each year thereafter. Assume that the real risk-free rate is 2,00% and that this rate will remain constant. Three-year Treasury securities yield 12,87%, while 7-year Treasury securities yield 13,47%. What is the difference in the maturity risk premiums (MRPS) on the two securities; that is, what is MRP, - MRP3?arrow_forwardSuppose you are considering two possible investment opportunities: a 12-yearTreasury bond and a 7-year, A-rated corporate bond. The current real risk-free rateis 4%, and inflation is expected to be 2% for the next 2 years, 3% for the following4 years, and 4% thereafter. The maturity risk premium is estimated by this formula:MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimatedto be 0.3%. You may determine the default risk premium (DRP), given thecompany’s bond rating, from the table below. Remember to subtract the bond’s LPfrom the corporate spread given in the table to arrive at the bond’s DRP. Whatyield would you predict for each of these two investments?RateCorporate Bond Yieldarrow_forwardSuppose we observe the 3-year Treasury security rate (1R3) to be 8 percent, the expected 1-year rate next year—E(2r1)—to be 4 percent, and the expected one-year rate the following year—E(3r1)—to be 6 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year Treasury security rate, 1R1?arrow_forward
- Assume that the real risk-free rate of return, k*, is 3%, and it will remain at that level far into the future. Also assume that maturity risk premiums (MRP) increase from zero for bonds that mature in one year or less to a maximum of 1%, and MRP increases by 0.2% for each year to maturity that is greater than one year-that is, MRP equals 0.2% for two-year bond, 0.4% for a three-year bond, and so forth. Following are the expected inflation rates for the next five years: Year Inflation Rate (%) 2017 5 2018 6 2019 7 2020 8 2021 9 a) Compute the interest rate for a one-, two-, three-, four-, and five-year bond. b) If inflation is expected to equal 9% every year after 2021, what should be the interest rate for a 10- and 20-year bond? c) Plot the yield curve for the interest rates you computed in part [a] and [b]. d) Based on the curve (in part c), interpret your findings.arrow_forwardSuppose the real risk-free rate is 2.5%, the average future inflation rate is 2.3%, a maturity premium of 0.07% per year to maturity applies, i.e., MRP = 0.07% (t), where t is the years to maturity. Suppose also that a liquidity premium of 1% and a default risk premium of 0.7% applies to A-rated corporate bonds. How much higher would the rate of return be on a 7-year A-rated corporate bond than on a 5-year Treasury bond. Here we assume that the pure expectations theory is NOT valid. O 1.84% O 1.64% O 1.44% O 1.24% 1.04%arrow_forwardSuppose we observe the 3-year Treasury security rate (1R3) to be 8 percent, the expected 1-year rate next year—E(2r1)—to be 4 percent, and the expected one-year rate the following year—E(3r1)—to be 6 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year Treasury security rate, 1R1? (Round your answer to 2 decimal places.)arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning