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Expectations Theory and Inflation
Suppose 2-year Treasury bonds yield 5.9%, while 1-year bonds yield 6.8%. r* is 1.75%, and the maturity risk premium is zero.
Using the expectations theory, what is the yield on a 1-year bond, one year from now? Calculate the yield using a geometric average. Round your answer to two decimal places.
%
What is the expected inflation rate in Year 1? Round your answer to two decimal places.
What is the expected inflation rate in Year 2? Round your answer to two decimal places.
The financial planning process
Annual interest rates consider the effect of interest earned on reinvested interest payments: When comparing loans, you should compare the effective annual rates: Annual and effective interest rates are equal when interest is compounded annually:
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A stock has an expected return of 15.8 percent, the risk-free rate is 6.3 percent, and the market risk premium is 7.5 percent. What must the beta of this stock be?
If the yields on treasury bonds rise significantly but there is no change in the outlook for economic growth and profits (and no change in investor risk aversion level or required risk premium) the stock market should
The six month and one-year rates are 3% and 4% per annum with semi-annual compounding. Is 3.90% or 3.95% or 3.99% closest to the one-year par yield expressed with semi-annual compounding?
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