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Determinants of Interest Rate for Individual Securities The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.60 percent, and the 6-year Treasury rate is 7.70 percent. From discussions with your broker, you have determined that expected inflation premium is 3.15 percent next year, 2.85 percent in Year 2, and 3.50 percent in Year 3 and beyond. Further, you expect that real interest rates will be 3.90 percent annually for the foreseeable future. What is the maturity risk premium on the 6-year Treasury security?
Suppose you are a regular subscriber to the Financial Times and are considering whether to renew your subscription for a single year or two years. If your cost of capital is 10%, purchasing a two-year subscription for $775 rather than a one-year subs..
Dillion labs has asked its financial manager to measure the cost of each specific type of capital as welll ass the WACC. The WACC is to be measured by using the following weights: 40% long term debt, 10% preferred stock, and 50% common stock equity(r..
According to the Modified Accelerated Cost Recovery System (MACRS) of depreciation imposed by US tax law, autos in computers must be depreciated the following way for tax purposes: Year one 20%, Year two 32%, Year three 19.20%, Year four 11.52%, Year..
A 15-year annuity pays $2,150 per month, and payments are made at the end of each month. If the interest rate is 9 percent compounded monthly for the first eight years, and 6 percent compounded monthly thereafter, what is the present value of the ann..
When making “adjustment” or “improvement” on the current financial structure policy, why do most CFOs choose to make changes at the margin rather than tinkering radically?
You have finally saved $10,000 and are ready to make your first investment. You have the three following alternatives for investing that money: Calculate the value of each investment based on you required rates of return. Which investment would you s..
A thrift is planning to buy Treasury securities next month. To hedge the risk, should it buy or sell futures contracts? Explain. The portfolio you manage is holding $5 million of treasury bonds with a 7% coupon rate and 5 years to maturity with a pri..
You are looking into a company that has never paid a dividend. They have just announced that they will be paying a one-time dividend of $20 per share in two years. what is the value of the stock today? What will the value of the stock right after th..
Explain the relationship observed between the required rate of return, growth rate and the dividend paid, and the estimated value of the stock using the Gordon Model. Explain the value and weaknesses of the Gordon model
One of the common disadvantages of the discounted payback decision rule is that I may cause:
The Corner Grocer has a 7-year, 6 percent annual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 5.5 percent. What is the percentage change in the price of this bond when the yield to maturity goes up to 7%?
You buy a 20-year bond with a coupon rate of 8.8% that has a yield to maturity of 9.8%. (Assume a face value of $1,000 and semiannual coupon payments.) Six months later, the yield to maturity is 10.8%. What is your return over the 6 months?
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