The attachement is my homework, please finish it carefully, thanks.

Homework 4 1. Carl Forster, a trainee at an investment banking firm, is trying to get an idea of what real rate of return investors are expecting in today's marketplace. He has looked up the rate paid on 3-month U.S. Treasury bills and found that it to be 5.5%. He has decided to use the rate of change in the Consumer Price Index as a proxy for the inflationary expectation of investors. That annualized rate now stands at 2.5%. On the basis of the information that Carl has collected, what estimate can he make of the real rate of return? 2. A firm wishing to evaluate interest rate behavior has gathered yield data on five U.S. Treasure securities, each having a different maturity and all measured at the same point in time. The summarized data follow. U.S. Treasure security A B C D E Time to maturity 1 year 10 years 6 months 20 years 5 years Yield 12.60% 10.2 14.0 10.0 10.4 a. Draw the yield curve associated with these data. b. Describe the resulting yield curve in part a, and explain the general expectations embodied in it. 3. A recent study of inflationary expectations has revealed that the consensus among economic forecasters yields the following average annual rates of inflation expected over the period noted. (Note: Assume that the risk that future interest rate movements will affect longer maturities more than shorter maturities is zero; that is, there is no maturity risk.) Period 3 months 2 years 5 years 10 years 20 years Average annual rate of inflation 5% 9% 9% 9.50% 9% a. If the real rate of interest is currently 2.5%, find the nominal rate of interest on each of the following U.S. Treasure issues: 20-year bond, 3-month bill, 2-year note, and 5-year bond. b. If the real rate of interest suddenly dropped to 2% without any change in inflationary expectation, what effect, if any, would this have on your answers in part a? Explain. c. Using your findings in parts a, draw a yield curve for U.S. Treasury securities. Describe the general shape and expectation reflected by the curve. d. What would a follower of the liquidity preference theory say about how the preferences of lender and borrowers tend to affect the shape of the yield curve drawn in the part c? Illustrate that effect by placing on your graph a dotted line that approximates the yield curve without the effect of liquidity preference. e. What would a follower of the market segmentation theory say about the supply and demand for long-term loans versus the supply and demand for short-term loans given the yield curve constructed for the part c of this problem? 4. The real rate of interest is currently 4%; the inflation expectation and risk premium for a number of securities follow. Inflation Expectation Security Premium Risk premium A 6% 3% B 7 2 C 8 2 D 3 4 E 11 1 a. Find the risk-free rate of interest, RF, that is applicable to each security. b. Although not noted, what factor must be the cause of the differing risk-free rates found in part a? c. Find the nominal rate of interest for each security. 5. Assume that the Financial Management Corporation's $1,000-par-value bond had a 6.700% coupon, matured on May 15, 2020, had a current price quote of 97.708, and had a yield to maturity (YTM) of 7.034%. Given this information, answer the following questions: a. What was the dollar price of the bond? b. What is the bond's current yield? c. Is the bond selling at par, at a discount, or at a premium? Why? d. Compare the bond's current yield calculated in part b to its YTM and explain why they differ. 6. Using the information provided in the following table, find the value of each asset. Cash flow Asset A end of year 1 Amount $5,000 Appropriate required return 14% B C D E 2 3 1 through 1 2 3 4 5 1 through 5 6 1 2 3 4 5 6 5,000 5,000 $400 $0 $0 $0 $0 85,000 $2,500 8,500 $3,000 2,000 8,000 7,000 4,000 1,000 10% 12% 12% 19% 7. Pecos Manufacturing has just issued a 15-year, 12% coupon interest rate, $1,000-par bond that pays interest annually. The required return is currently 13%, and the company is certain it will remain at 13% until the bond matures in 15 years. a. Assuming that the required return does remain at 13% until maturity, find the value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3 years, and (6) 1 year to maturity. b. Plot your findings on a set of \"time to maturity (x axis) - market value of bond (y axis)\" axes constructed similarly to Figure 6.5 on page 246. c. All else remaining the same, when the required return differs from the coupon interest rate and is assumed to be constant to maturity, what happens to the bond value as time moves toward maturity? Explain in light of the graph in part b. 8. The Salem Company bond currently sells for $1,085, has a 11% coupon interest rate and a $1,000 par value, pays interest annually, and has 15 years to maturity. a. Calculate the yield of maturity (YTM) on this bond. b. Explain the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of bond. Spreadsheet Exercise CSM Corporation has a bond issue outstanding at the end of 2012. The bond has 15 years remaining to maturity and carries a coupon interest rate of 8%. Interest on the bond is compounded on a semiannual basis. The par value of the CSM bond is $1,000 and it is currently selling for $874.42. 1. Create an Excel spreadsheet examples located in the chapter for yield to maturity and semiannual interest to model the following: a. Create a spreadsheet similar to the Excel spreadsheet examples to solve for yield to maturity. b. Create an Excel spreadsheet to solve for the bond price if the yield to maturity is 2% higher. c. Create an Excel spreadsheet to solve for the bond price if the yield to maturity is 2% lower. Some videos you may find helpful. Bond valuation (TedEd) Price Behavior of a Bond Real versus nominal rates (TedEd) Fisher effect (TedEd) Taxable vs. Municipal Bonds (TedEd) Term structure of interest rates (TedEd) Expectations Hypothesis Yield to maturity (TedEd)