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For the questions 1-7, please assume what follows: You are considering two separate investment opportunism a. T-note b. Equally actively traded AAA-rated Corporate debt security
For the questions 1-7, please assume what follows: You are considering two separate investment opportunism a. T-note b. Equally actively traded AAA-rated Corporate debt security issued by JP Morgan Chase Both securities promise to pay back $1,000 at their maturity in three years. T-note is currently trading at $839.62 AAA-rated corporate security is currently trading at $793.83 Note: Standard rounding applies through all calculations Q1 Please calculate market implied (promised) YTM on both securities Q2. Under assumption that Texas is your permanent residence, please calculate market implied Default Risk Premium (DRP) on AAA-rated corporate note (in both: dollars & percentage) and present results of your analysis in graphical form (just as we did in classroom) 03, Under assumption that market participants expect on average 2% annual rate of inflation over your investment horizon, please estimate market implied annual real risk-free rate of return (real interest rate or RRFR) 04. Further assume that on the same day early afternoon CNBC business TV station broke out news of a severe recession unavoidably looming over United States. You noticed immediate response in the market, such as T-note's prices increased from $839.62 to $876.30 and this particular AAA-rated JP Morgan Chase note's prices declined from $793.83 to $751.31 Please recalculate DRP (in both: dollars & percentage) under new market conditions and graphically illustrate results of your analysis. Q5. What happened to DRP? 06-Once again, under assumption that market participants expect on average 2% annual rate of inflation over your investment horizon, please re-calculate an annual real risk-free rate of return (real interest rate aka RRFR) Q7. Based on your calculations, information provided, and the Theory of Portfolio Choice, what is the most likely cause of changes in T-Note's price & yield? Based on your calculations, do you have enough empirical evidence to confirm relationship betweern real interest rates & economic business cycle
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