The federal funds rate set by the Fed is 4%, and inflation is 3%. The real interest rate that people can borrow money at is 1.5%. Draw an MP curve. Determine the risk premium. Label it and the risk-free interest rate on your graph Illustrate how the MP curve will change if the risk premium increased.
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The federal funds rate set by the Fed is 4%, and inflation is 3%. The real interest rate that people can borrow money at is 1.5%.
Draw an MP curve. Determine the risk premium. Label it and the risk-free interest rate on your graph
Illustrate how the MP curve will change if the risk premium increased.
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- You are considering investing money in Treasury bills and wondering what the real risk-free rate of interest is. Currently, Treasury bills are yielding 4.3% and the future inflation rate is expected to be 2.5% per year. Ignoring the cross product between the real rate of interest and the inflation rate, what is the real risk-free rate of interest?Consider a borrow-and-invest strategy in which you use $1 million of your own money and borrow another $1 million (at the t-bill rate) to invest $2 million in a market index fund. If the risk free interest rate is 5.52 percent and the expected rate of return on the market index fund is 12.68 percent, what is the risk premium on this borrow-and-invest strategy?The following data are gathered for:· The real risk-free rate is 1.25%· Inflation premium is constant at 2.50%· Default risk premium is 5%· Liquidity risk premium is 0.50% What is the quoted rate on a short-term government security?
- Suppose the real rate on your investment is 9.5 percent and the inflation rate is 2.6 percent. What nominal rate would you expect to see on your investment? Use the Fisher Effect Formula.Suppose that the price of a Treasury bill with90 days to maturity and a $1 million face valueis $980,000. What is the yield on a bankdiscount basis? *Please include work*John Ayena, 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 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 expectations of investors. That annualized rate now stands at 3%. On the basis of the information that John has collected, what estimate can he make of the real rate of return?
- Joan, the project manager, asks you to evaluate alternatives A and B on the basis of their PW values using a real interest rate of 10% per year and an inflation rate of 3% per year (a) without any adjustment for inflation, and (b) with inflation considered. Also, write the spreadsheet functions that will display the correct PW values. (c) Joan clearly wants alternative A to be selected. If inflation is steady at 3% per year, what real return i would machine A have to generate each year to make the choice between A and B indifferent? What is the required return with inflation considered? Machine A B First cost, $ −31,000 −48,000 AOC, $ per year −28,000 −19,000 Salvage, $ 5,000 7,000 Life, years 5 5Given $100,000 to invest, what is the expected risk premium in percentage and in dollars of investing in equities versus risk-free T-bills (U.S. Treasury bills) based on the following table?The market has an expected rate of return of 12.0 percent. The long-term government bond is expected to yield 4.8 percent and the U.S. Treasury bill is expected to yield 2.3 percent. The inflation rate is 3.2 percent. What is the market risk premium?
- What is the present value of the following cash flows, if the discount rate is 10% annually? (If you can type solutions or calculations in EXCEL, it would be great! Thanks!)Assume inflation is 2.60% and the nominal (annual) interest rate is 6.35%. If the interest rate is held constant, but inflation rises to 5.25%, does it cost more or less in real terms to borrow money than when the inflation rate was 2.60%? Explain your answer and make sure to include your real interest rates in both situation.Suppose that we make contributions to a fund of $125 today and $750 in twoyears for a return of $1000 in one year. First write the Net Present Value as a function of the discount factor ν. Secondly, use the NPV to calculate the yield rate of this investment (select the larger value for i. Finally, explain whether or not this is a good investment for us. Please show all work
