Question
You are given the following information: R*=2% Investors expect inflation to average 2% per year into the foreseeable future The MRP on 10 yr bonds
You are given the following information:
R*=2%
Investors expect inflation to average 2% per year into the foreseeable future
The MRP on 10 yr bonds = 0.5%
The LP on U.S. and Yubaba Inc. bonds=0
The interest rate on a 10 year loan to Yubaba Inc. is 1.5 times the rate on a 10 year loan to the U.S. government
a)What is the interest rate on a 1 year loan to the U.S. government?
B) What is the interest rate on a 10 year loan to the U.S. government?
C) What is the DRP on a 10 year loan to Yubaba Inc?
2) You just received a generous birthday present from your favorite Uncle-- $1,000 (partly a reward for the excellent grades youve been getting at Pace). You plan on investing cash and expect to earn a return of 11% per year, compound annually.
a)How much will you have available in 10 years?
b)Your goal is to have $5,000 available in 10 years. What rate of return,compounded annually, would you have to earn to achieve your goal?
c) The rate of return in part b) above involves too much risk. If the maximum risk youre willing to accept involves a rate of return of 13% per year, compound annually, how long will it take to achieve your goal of $5,000?
D) Suppose you could earn a rate of return of 13% per year, compounded daily. How long would it take to achieve your goal now?
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