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A. The real risk-free rate is 3%. Inflation is expected to be 2% this year, 4% next year, and then 3.5% thereafter. The maturity risk premium is estimated to be 0.0004 x (t - 1), where t = number of years to maturity. What is the nominal interest rate on a 7-year Treasury security? Round your answer to two decimal places.
B. Absalom Motors's 8% coupon rate, semiannual payment, $1,000 par value bonds that mature in 30 years are callable 6 years from now at a price of $1,025. The bonds sell at a price of $1,254.87, and the yield curve is flat. Assuming that interest rates in the economy are expected to remain at their current level, what is the best estimate of the nominal interest rate on new bonds? Round your answer to two decimal places.
Mammoth Mutual Fund of New York has $10 million to invest in certificates of deposit (CDs) for the next 6 months (180 days). It can buy either a Pittsburgh National Bank (PNB) CD with an annual yield of 11 percent, or a Swiss bank CD with a yield of ..
XYZ, Inc. is planning to offer a $1000 face value 10-year bond with a coupon rate of 8%. The coupon payments are made semi-annually. If you require a 10 percent rate of return, what is the price you would pay for this bond?
A $165,400 mortgage is taken out at 3.35% for 15 years, for the purchase of a house. The loan requires monthly payments. Find the total interest paid over the life of the loan?
A company's 5-year bonds are yielding 9.9% per year. Treasury bonds with the same maturity are yielding 5.15% per year, and the real risk-free rate (r*) is 2.65%. The average inflation premium is 2.1%, and the maturity risk premium is estimated to be..
Dividends may be paid in cash or stock. A cash dividend reduces a corporation's cash and retained earnings. A stock dividend does not affect corporation's cash or equity
The Center for Shaker Crafts (CSC) is thinking about bringing a new exhibit to the Center. It will cost the Center $30,000 to bring the exhibit to town, an additional $12,000 for lighting and security equipment, and $5,500 for an insurance policy.
One-year Treasury bills currently earn 2.25 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 2.45 percent and that two years from now, 1-year Treasury bill rates will increase to 2.95 percent. The liquidity prem..
A Chicago merchant plans to import a shipment of materials from France costing 1,000,000. Spot exchange rate is $1.28. To hedge against a rise in the value of the euro, the merchant buys March euro futures at a futures price of $1.32. Contract size i..
What does this imply about inflation and the forward rates in the yield curve at the time of origination?- What is implied if a FRM were available at 10 percent? 12 percent?
Star Light & Power increases its dividend 4.1 percent per year every year. This utility is valued using a discount rate of 12 percent, and the stock currently sells for $41 per share. If you buy a share of stock today and hold on to it for at least t..
The price of the used car is $20,000. Sales tax on this car is 8.4% of the price of the vehicle. You intend to finance the entire cost of the car and sales tax, less a down payment of $1,500. You intend to finance the car for 48 months and your car p..
A sporting goods manufacturer has decided to expand into a related business. Management estimates that to build and staff a facility of the desired size and to attain capacity operations would cost 450 million in present value terms. Alternatively, t..
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