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- Let's say we expect the inflation rate to be 7 percent in a year, 5 percent in two years and 3 percent thereafter. The real risk-free interest rate, r*, is constant at 2%, and the maturity risk premium on government bonds begins at zero on ultra-short-term bonds (with a maturity of several days) and rises to 0.2% on bonds with a one-year maturity. The maturity risk premium increases by 0.2% for each one-year increase in maturity, and the five-year maturity and higher maturity of government bonds are constant at the upper limit of 1.0%. 1) Calculate the interest rates of one year, two years, three years, four years, five years, ten years and twenty years of government bonds.Assume that it is January 1, 2003. The rate of inflation is expected to be 4 percent thought 2003. However, increased government deficits and renewed vigor in the economy are then expected to push information rates higher. Investors expect the inflation rate to be 5 percent in 2004, 6 per percent cent in 2005, and 7 percent in 2006. The real risk-free rate, k*, is expected to remain at 2 percent over the next 5years. Assume that on maturity risk premiums are required on bonds with 5 years of less to maturity. The current interest rate on 5 year T-bonds is 8 Percent. What is the average expected inflation rate over the next 4 year? What should be the prevailing interest rate on 4-year T-bond? What is the implied expected inflation rate in 2007, or Year 5, give that Treasury bonds which mature in the year yield 8 percent?answer all 3 sub parts Given C = 0.8Y + 50, I = 1000 – 20i, and G = 50, derive the IS equation as A. IS: i = - 0.01Y - 5 B. IS: i = - 0.01Y +50 C. IS: i = - 0.01Y +55 D. IS: i = - 0.001Y - 5 E. IS: i = - 0.01Y +5 2. What is the inflation rate as a result of the expansionary fiscal policy if Aggregate price level in year 1 is R13 and the Aggregate price level in year 2 is 14? Round off the answer to 2 decimal places. A. 7.69% B. -7.69% C. 13.3% D. -13.3% E. 33.3% 3. When the inflation rate changes from 5% in 2005 to 2% in 2006, this indicates that: A. There is a deflation B. price levels are decreasing C. Inflation is increasing at a faster rate D. Price levels are increasing at a slower rate
- Define and describe the relationships between the following: actual and real dollars, inflation, and real and market (combined) interest ratesThe risk-free rate is 4.8%, and expected inflation is 3.2%. If inflation expectation such that future expected inflation rises to 4.5%, what will the new risk-free rate bethere is a general tendency for interst rates and the rate of inflation to have an inverse relationship". taking the statement into consideration, explain the type of inflation that may occur as a result of increasing interest rates
- if you expect the inflation rate to be 15 percent next year and a one-year bond has a yied to maturity of 7 percent, then the real interest rate on this bond is ___%.Edison receives a portion of his income from his holdings of interest-bearing government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario. NOTE: options for drop down questions are as follows Compared with lower inflation rates, a higher inflation rate will ______ (increase OR decrease) the after-tax real interest rate when the government taxes nominal interest income. This tends to _______ (encourage OR discourage) saving, thereby _______ (increasing OR decreasing) the quantity of investment in the economy and _______ (increasing OR decreasing) the economy's long-run growth rate.On July 30, 2017, the following information was available to an investor:Yield on 10-year TIPS: 0.58%Yield on 10-year Treasury notes: 2.31%What was the expected annual rate of inflation over the next 10 years as of June 30, 2017?
- Assume that 3 year Treasury note has no maturity premium and that the risk free rate is 5 percent. If the t note carries a nominal risk free rate of return of 13 percent and If the expected average inflation rate over the next 2 years is 9 percent. What is the expected inflation rate in year3. a. 9 b. 6 c. 12 d. 18 e. 7The 5 yr swap rate is the rate that can be earned over five years from a series of short term loans to AA rated companies True FalsQ 2. Expected inflation can be estimated as a. the return on a TIPS bond b. the return on a Treasury bond c. the return on a TIPS bond minus the return on a Treasury bond d. the return on a Treasury bond minus the return on a TIPS bond