Inflation rate is likely after year 1, Financial Management

a) Suppose that the real risk-free rate, r*, is 3% and that inflation is assumed to be 7% in Year 1, 5% in Year 2, and 4% after that. Suppose also that all Treasury securities are highly liquid and free of default risk. If 2-year and 5-year Treasury notes both yield 10%, what is the dissimilarity in the maturity risk premiums (MRPs) on the two notes; that is, what is MRP5 minus MRP2?

b)  Because of a recession, the inflation rate likely for the coming year is only 4%. Though, the inflation rate in Year 2 and thereafter is likely to be constant at some level above 4%. Suppose that the real risk-free rate is r* = 2% for all maturities and that there are no maturity premiums. If 3-year Treasury notes yield 2 percentage points more than 1-year notes, what inflation rate is likely after Year 1?

 

Posted Date: 3/30/2013 1:58:16 AM | Location : United States







Related Discussions:- Inflation rate is likely after year 1, Assignment Help, Ask Question on Inflation rate is likely after year 1, Get Answer, Expert's Help, Inflation rate is likely after year 1 Discussions

Write discussion on Inflation rate is likely after year 1
Your posts are moderated
Related Questions
What are the Government Securities Government is one of the biggest borrowers from capital and money market. We have already taken a look at money market securities offered by

Finance companies Finance companies make loans to individuals as well as corporations by providing consumer lending business lending also mortgage financing. A few of their loa

Question: Part A: Justify and criticize the usual assumption made in Financial Management literature that the objective of a firm is to maximize the wealth of its sharehol

Question: In each case below and having regard to your knowledge of Accounting Concepts, comment on and assess the validity of the accounting implications/practices to be adop

A mortgage, is sold to the SPV at the discretion of the bank to securitize it into a mortgage backed security, that is, the mortgage is said to

Uses of operating cycle in business

These securities aid in unpacking the cash flows from a pass-through. The most uncomplicated stripped mortgage-backed securities are the PO-IO-security. Unlike a

Gretz Tool Company is a large U.S based Multinational Corporation with subsidiaries in eight different countries. The parent of Gretz provided initial cash infusion to establish ea

Special bond structures are the municipal securities bearing special security structures. They are of two types - insured bonds and pre-refunded bonds.

What do you mean by Interest rate swap? Explain the various types of interest rate swap Meaning: It is an arrangement where by one party exchange one set of interest rate paymen