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
Why does the riskiness of portfolios have to be looked at differently than the riskiness of individual assets? The riskiness of portfolios has to be seemed to be at differently

Assume you manage a $4.42 million fund that having of four stocks with the following investments: Stock Investment Beta A

how would you judge the potential profit of Bajaj Electronics on the first year of sales to booth plastice and give your views to to increase the profit

A bank comprises a $500 million portfolio of investments and bank credits. The everyday standard deviation of return on this portfolio is .666 %. Capital adequacy standards need th

Calculation of before-tax return on capital employed Total net before-tax cash flow = 122 + 143 + 187 + 78 = $530000 Total depreciation = 250000 - 5000 = $245000 Average

Third Inc. wishes to issue a perpetual callable bond. The current interest rate is 6%. Next year, there is a 30% chance that the interest rate will be 4.5% and a 70% chance that th

what is the cost of capital and advantages of it?

Examine about the Risk-based auditing A risk based audit will be reviewing the risk management process and considering main risks of the organisation as a whole. Risk manage

Gary and Joyce Yau, both 30, last month bought their dream house in London, Ontario. The purchase price was $450,000 plus addition fees such as taxes, legal fees, administration fe

SCOPE OF FINANCE FUNCTION In several businesses, based on the complexity and size of financial decision-making, the scope of finance function may be categorized into incidenta