Problem 4-23 Determinants of Interest Rates

Suppose you and most other investors expect the inflation rate to be 7% next year, to fall to 5% during the following year, and then to remain at a rate of 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on Treasury securities rise from zero on very short-term securities (those that mature in a few days) to a level of 0.2 percentage points for 1-year securities. Furthermore, maturity risk premiums increase 0.2 percentage points for each year to maturity, up to a limit of 1.0 percentage point on 5-year or longer-term T-notes and T-bonds.

1. Calculate the interest rate on 1-year Treasury securities. Round your answer to two decimal places. % Calculate the interest rate on 2-year Treasury securities. Round your answer to two decimal places. % Calculate the interest rate on 3-year Treasury securities. Round your answer to two decimal places. % Calculate the interest rate on 4-year Treasury securities. Round your answer to two decimal places. % Calculate the interest rate on 5-year Treasury securities. Round your answer to two decimal places. % Calculate the interest rate on 10-year Treasury securities. Round your answer to two decimal places. % Calculate the interest rate on 20-year Treasury securities. Round your answer to two decimal places. %

Problem 4-9 Bond Valuation and Interest Rate Risk

The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year.

1. 1. What will be the value of each of these bonds when the going rate of interest is 5%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.

      Bond L	$
      Bond S	$

   2. What will be the value of each of these bonds when the going rate of interest is 8%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.

      Bond L	$
      Bond S	$

   3. What will be the value of each of these bonds when the going rate of interest is 12%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.

      Bond L	$
      Bond S	$

Problem 4-10 Yield to Maturity and Required Returns

The Brownstone Corporation's bonds have 5 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 9%.

1. 1. What is the yield to maturity at a current market price of $824? Round your answer to two decimal places. %
   2. What is the yield to maturity at a current market price of $1,106? Round your answer to two decimal places. %