Ch 6 PLEASE HELP WITH QUESTIONS 6.8 , 6.10 , and 6.11.
Financial Assets An analyst is evaluating securities in a developing t has been warned INFLATION CROSS-PRODUCT where the the cross-product between the real rate and inflation. If the real risk-free rate is eo ignore inflation is expected to be 16% each of the next 4 years, what is the yield on a 4-year 6-6 ana inflation rate is very high. As a h no maturity, default, or liquidity risk? (Hint: Refer to The Links between Inflation and Interest Rates: oser Look" on Page 178.) 6-7 EXPECTATIONS T One-year Treasury securitiesyield5%. The market anticipa HEORY securities will yield 6%. If the pure expectations that 1 year from now, 1-year Treasury theory is correct, what is the yield today for 2-year Treasury securities? EXPECTATIONS THEORY Interest rates on 4-year Treasury securities are currently 7% while 6-year Treasury securities yield 7.5% If the pure expectations theory is correct. does the market believe that 2-year securities will be yielding 4 years from now? EXPECTED INTEREST RATE this year, 4% next year, and 3.5% thereafter. The maturity risk premium is estimated to 0.05 x (t-1)%, where t-number of years to maturity. what is the yield on a 7-year Treasury note? 69 The real risk-free rate is 3%. Inflation is expected to be 3% INFLATION Due to a recession, expected inflation this year is only 3%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above Assume that the expectations theory holds and the real risk-free rate is r*-2%. If the yield on 3-year Treasury bonds equals the 1-year yield plus 2%, what inflation rate is expected after Year 1? 810 6-1 DEFAULT RI bonds with the same maturity are yielding 52% per year, and the real risk 2.3%. The average inflation premium is 2.5%, and the maturity risk premium is estimated to be 0.1 x (t-1)%, where t number of years to maturity if the liquidity premium is 1% what is the default risk premium on the corporate bonds? SK PREMIUM A company's 5-year bonds are yielding 7.75% per year. Treasury -free rate (r) is MATURITY RISK PREMIUM An investor in Treasury securities expects inflation to be in Year 1, 32% in Year 2, and 3:6% each year thereafter. Assume that the real risk-free rate /275% and that this rate will remain constant. Three-year Treasury securities yield 625 while 5-year Treasury securities yield 6.50% what is the difference in the maturity ris premiums (MRPs) on the two securities; that is, what is MRPs MRP3? DEFAULT RISK PREMIUM The real risk-free rate, r, is 2.5%. Inflation is expected to avera 2.8% a year for the next 4 years, after which time inflation is expected to average 3 year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yied of 8.3%, which includes a liquidity premium of 0.75%, what is its default risk premium .75% a EXPECTATIONS THEORY AND INFLATION bonds yield 3%, r" is 1%, and the maturity risk premium is zero Suppose 2-year Treasury bonds yield 45% while 1-year i Using the expectations theory, what is the yield on a 1-year bond 1 year from b. What is the expected inflation rate in Year 1? Year 2? a. now? EXPECTATIONS THEORY Assume that the real risk-free rate is 2% and that the ma premiums zero. If the 1-year bond yield is 5% and a 2-year bond (of similar risk) hat is the 1-year interest rate that is expected for Year 2? What inflation expected during Year 2? Comment on why the average interest rate during the 2-yea period differs from the 1-vear interest ratn
