CHAPTER 2 PROBLEMS THE FINANCIAL MARKETS AND INTEREST RATES PROBLEM 2-1 CALCULATING THE DEFAULT-RISK PREMIUM 10-Year Treasury bond 4,00% 10-Year Corporate bond 6,80% Liquidity premium 0,40% Default risk premium = 0,00% PROBLEM 2-3 INFLATION AND INTEREST RATES Expected return =8%(nominal) 6%(real) E(inflation) =0,00% PROBLEM 2-10 INTEREST RATE DETERMINATION 10-year T-bonds =4,9%= rf + MP [+ IP + TP] inflation premium =2,1% MP =0,30% LP =0,00% DP =0,000% PROBLEM 2-13 TERM STRUCTURE OF INTEREST RATES (a) Original Investment Interest rate Investment after 2 years Original investment Interest rate Investment after 1 year Difference 0,00 The second year would need to make up for the difference by paying: #DIV/0! PROBLEM 2-14 YIELD CURVE Term Yield 6 months0,5 1 year1 2 years2 3 years3 4 years4 5 years5 10 years10 15 years15 20 years20 30 years30 Graph here