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This morning, you observe in the markets that the nominal interest rate is 6%, which includes inflation expectations of 4%. If inflation expectations go up by 1% and nominal interest rates go up by 1.5%, what is the resulting real interest rate?
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- 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 the interest rate on a 1-year government bond is 3.00%, on a 4-year government bond is 3.50% and that on a 6-year government bond is 4.90%. What is the market's forecast for 2-year rates 4 years from now, assuming the pure expectations theory is correct? Show your work.Suppose the interest rate on a 3-year treasury note is 2.75%, and 6-year notes are yielding 3.50%. Based on the expectations theory, what does the market believe that 3-year treasuries will be yielding 3 years from now?
- he real short-term risk - free rate is 0.5% and the expected inflation rate is 1% for each of the next three years, and 1.5% for each of the following two years. Two - year Treasury notes yield 2.9% and five - year Treasury notes yield 4.1%. What is the maturity risk premium on the two year note?Suppose we observe the 3-year Treasury security rate (1R3) to be 8 percent, the expected 1-year rate next year—E(2r1)—to be 4 percent, and the expected one-year rate the following year—E(3r1)—to be 6 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year Treasury security rate, 1R1? (Round your answer to 2 decimal places.)Suppose that the nominal rate of interest is 5% and the expectedrate of inflation is 2%. Whats is the expected real rate ofinterest according to Fisher? Calculate the after-tax expected realrate of assuming a 30% marginal tax rate. If inflation expectationsincrease by 2%, what will be the new nominal rate according tofisher? According to darby/feldstein? What should happen to bondprices and stock prices if the expected rate of inflationincrease
- Assume the nominal interest rate is 12 percent and the expected rate of inflation is 8 percent. Calculate real rate of interest. Now assume instead that the nominal interest rate is 4 percent and the expected rate of inflation is minus 2 percent. Calculate the real rate of interest. Assume the expected rate of inflation is 6 percent per year. What nominal interest rate should you charge to receive a real interest rate of 2 percent per year?Suppose we observe the 3-year Treasury security rate (1R3) to be 8 percent, the expected 1-year rate next year—E(2r1)—to be 4 percent, and the expected one-year rate the following year—E(3r1)—to be 6 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year Treasury security rate, 1R1?Suppose the interest rate on a 3-year Treasury Note is 1.25%, and 5-year Notes are yielding a 3.50%. Based on the expectations theory, what does the market believe that 2 year treasuries will be yielding 3 years from now?
- Suppose investors can earn a return of 2% per 6 months on a Treasury note with 6 months remaining until maturity. What price would you expect a 6-month maturity Treasury bill to sell for?The real risk-free rate is 2.36%, inflation is expected to be 4.75% this year, and the maturity risk premium is zero. What is the equilibrium rate of return on a 1-year Treasury security? (Express your answer as a percent and round your final answer to 2 decimal places.)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?