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Create an Excel spreadsheet to organize your answers to the following problem, and submit your Excel file as an attachment by clicking on the appropriate
Create an Excel spreadsheet to organize your answers to the following problem, and submit your Excel file as an attachment by clicking on the appropriate button on this page.
Part 1: Assuming that the pure rate of interest is 2%, and investors require an inflation premium of 3.5% and a risk premium of 6% to invest in a certain security, calculate the following rates using the multiplicative form of the Fisher model:
The nominal rate of interest on the security
The real rate of interest on the security
The risk-free rate of interest on securities of this maturity
(Please carry your final answers out to 2 decimal places.)
Part 2: An Inyo County California municipal bond is currently yielding 4.2%. What after-tax yield would you receive if you are in the following circumstances:
You are in a 28% federal tax bracket, and, as a California resident, you are in the 5% state tax bracket.
You are in a 33% federal tax bracket, and, as a Utah resident, you pay a 4% state income tax.
You are in a 15% federal tax bracket, and, as a Nevada resident, you pay no state income tax because Nevada has no income tax.
(Please carry your final answers out to 2 decimal places.)
Part 3: The expected return on a share of ExxonMobil stock in the U.S. is 15.6% while the expected return on a share of Royal Dutch Shell stock is 12.6% in the Netherlands. If the pure rate of return is 2% in both countries and the required risk premium is 6% for each company's stock, what is the long-term expected inflation rate in each country if the multiplicative form of the Fisher model is used in making the calculations?
(Please carry your final answers out to 2 decimal places.)
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