What do these results indicate about investor expectations

Assignment Help Financial Management
Reference no: EM131050922

How does inflation impact returns? In this example, you will see how the Fisher equation can be used to determine the best investment option. Suppose Jim has $2,000 to invest and he is not sure what will happen to inflation over the coming year, but the overall market expectation is for inflation to be around 3%. Jim is still uncertain, but he decides to hedge his bets and buy a $1,000 one-year bond paying a 4% annual coupon rate (Bond A). He puts the other $1,000 into a different one-year bond that is indexed to inflation that pays a 1% coupon rate plus an inflation premium that is linked to the consumer price index (Bond B). At the end of the year, the CPI shows that inflation was actually 5% for the year. How did Jim fare with his investments?

Questions to pose:

1. Which investment generated the highest return?

2. What do these results indicate about investor expectations?

Reference no: EM131050922

Questions Cloud

Compare cash and accrual accounting methodology : Describe the three types of project risks and detail the situation in which each type is most relevant when making a capital budgeting decision. Include the effect of correlation. Compare and contrast cash accounting methodology and accrual accountin..
What is the best estimate of these bonds remaining life : Lloyd Corporation's 12% coupon rate, semi-annual payment, $1,000 par value bonds, which mature in 25 years, are callable 6 years from today at $1,025. They sell at a price of $1,278.56, and the yield curve is flat. Assume that interest rates are expe..
What interest rate would the investment have to yield : Stanley Roper has $2,400 that he is looking to invest. His brother approached him with an investment opportunity that could give Patrick $4,600 in 4 years. What interest rate would the investment have to yield in order for Stanley’s brother to delive..
Money has different values based on time : Money has different values based on time. Money in your pocket has a current value, but money owed to you has a varying value based on how sure it is that you will receive it and when. It is possible to estimate its value. In this assignment, you wil..
What do these results indicate about investor expectations : How does inflation impact returns? In this example, you will see how the Fisher equation can be used to determine the best investment option. Suppose Jim has $2,000 to invest and he is not sure what will happen to inflation over the coming year, but ..
Options for investing the money to maximize your return : Suppose you have just inherited $10,000 and are considering the following options for investing the money to maximize your return: Put the money in an interest-bearing checking account, which earns 2%. The FDIC insures the account against bank failur..
The annual debt service payment : Assume the rate on the issuance of $100m of 100-year bonds is 7.5%; the annual debt service payment would be $7.505m. How high would the interest rate have to be on 30-year bonds for the annual debt service payment to be the same for both financings?
Project net present value if the required rate of return : A project is expected to create operating cash flows of $24,000 a year for three years. The initial cost of the fixed assets is $50,000. These assets will be worthless at the end of the project. An additional $2,500 of net working capital will be req..
Explain why correlations of these firms are expected to low : Diversification occurs when stocks with low correlations of returns are placed together in a portfolio. Identify at least one type of firm that might exhibit low correlations of returns with the overall stock market? Explain why the correlations of t..

Reviews

Write a Review

 

Financial Management Questions & Answers

  What is the stocks new price per share

Rocky Ground Camping Supply Inc. has 200,000 shares of stock outstanding, each with a par value of $5 and a market value of $15. In addition, on the balance sheet there is additional paid in capital of $950,000 and retained earnings of $1,450,000. Su..

  Equired return-what is the current share price

Marcel Co. is growing quickly. Dividends are expected to grow at a 22 percent rate for the next 3 years, with the growth rate falling off to a constant 6 percent thereafter. Required: If the required return is 14 percent and the company just paid a $..

  Include in taxable income from her operation

Kitty runs a brothel (illegal under state law) and has the following items of income and expense. What is the amount that she must include in taxable income from her operation?

  What is the firms weighted average cost of capital

Engle Archery, Inc. has 8,000 shares of common stock outstanding at a price per share of $61 and a rate of return of 15.2 percent. The firm has 2,000 shares of 6.8 percent preferred stock outstanding at a price of $72 a share. The yield-to-maturity o..

  Probability distribution of expected future returns

Probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.

  Calculate the interest component of payment

The interest rate on a $15,800 loan is 10.2% compounded semiannually. Semiannual payments will pay off the loan in seven years. Calculate the interest component of Payment 10. Calculate the interest paid in Year 6.

  As the beta of a stock goes up its return goes down

Financial markets on the whole are probably much more efficient than real asset markets. Mutual funds managed by professional money managers consistently outperform index mutual funds. In corporate insiders can beat the market this is evidence that t..

  Default risk and liquidity premiums for this companys bonds

Drongo Corporation's 4-year bonds currently yield 7.4 percent. The real risk-free rate of interest, r*, is 2.7 percent and is assumed to be constant. The maturity risk premium (MRP) is estimated to be 0.1%(t - 1), where t is equal to the time to matu..

  Present value of this investment pays

An investment pays you $20,000 at the end of this year, and $10,000 at the end of each of the four following years. What is the present value (PV) of this investment, given that the interest rate is 4% per year?

  Discuss many different financial ratios

Finance text books normally discuss many different financial ratios. Such as liquidity ratios and the rest. What is their purpose?  Can any ratio or combination of ratios predict a company's long-term viability?  Can you think of an example whereby o..

  What is the companys cost of equity capital

The Up and Coming Corporation's common stock has a beta of 1.6. If the risk-free rate is 5 percent and the expected return on the market is 11 percent, what is the company's cost of equity capital?

  Determine the incremental cash flow effects

Suppose that the above bank also owns a $ 1 million par value Treasury bond, purchased at par, with two years to maturity, paying $ 29,000 in semiannual interest, with a market value of $ 960,000. Determine the incremental cash flow effects if the ba..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd