This refers to the percentage that allows the investors to be compensated for any loss in purchasing power due to inflation. * A. Inflation Premium B. Liquidity Risk Premium C. None of the choices D. Maturity Risk Premium E. Real Risk Free of Interest
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This refers to the percentage that allows the investors to be compensated for any loss in
A. Inflation Premium
B. Liquidity Risk Premium
C. None of the choices
D. Maturity Risk Premium
E. Real Risk Free of Interest
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Solved in 2 steps
- Risk premiums on corporate bonds are usually anticyclical; that is, they decrease during business cycle expansions and increase during recessions. Why is this so?systemic risk inhere mainly in the largest financial institution. true or falseIn the table, suppose the equal probabilities for weak economy and strong economy. Security B pays $600 if the economy is week and $0 if the economy is strong. Cash Flow in One Year Security Market Price Today Weak Economy Strong Economy Market index 1000 750 1350 Security B 600 0 Risk-free bond 1280 1350 1350 1) The expected return of security B is %. (Round to 2 decimal places) 2) The risk premium of security B is %. (Round to 2 decimal places) 3) Suppose a new security C has a Market Price Today = 2 * Security B + Risk-free bond, the equal probabilities for weak economy and strong economy. Security C pays $2250 if the economy is week and $1350 if the economy is strong, the expected return of security C is %. (Round to 2 decimal places)
- What is a "liquidity premium"? Select one: a. Extra risk due to the lack of liquidity associated with short term investments. b. Extra risk due to the lack of liquidity associated with long term investments. c. Extra return due to the lack of liquidity associated with long term investments. d. Extra return due to the lack of liquidity associated with short term investments.The Bloomberg index, which tracks investment-grade bonds, was down more than 13% in 2022. The stock market went also south as the S&P 500 slid down more than 20% last year. Neither market helped investors. Why was the bond market down last year? Some analysts are forecasting that the bond market will perform better in 2023. Why are they taking that position? Would you realigned your portfolio to more in bonds than stocks this year? Use textbook and outside news sources to support your answers. TEXTBOOK: Economics of Money, Banking & Financial Markets; by Mishkin, Edition 13thIn financial economics, __________ is a concept that refers to the reduction in investment risk that can be achieved by combining various financial assets in a portfolio. It is a fundamental element of modern portfolio theory. A) DiversificationB) ArbitrageC) LeverageD) Speculation
- In Pakistan there is currently a pensions crisis because the government did not plan pensions of public sector employees efficiently. Instead of raising funds from lifetime earnings of employees, and giving pensionsas returns on savings, pensions currently require budgetary allocation in Pakistan, leading to financial burden on government. In developed countries like the US, where people plan their own pensions this planning for retirement requires a lot of effort, forward thinking and knowledge of financial opportunities. Even then pensions are never completely secure in the US.So, this system is not entirely suitable in Pakistan. Examine the Pension Crisis from perspective of Permanent Income Hypothesis and its modern versions to explain the possible causes of this crisis. Related to causes in part I suggest solutions to the pension crisis in PakistanBanks often close Repo-Deals with other banks. Today the lower Rhine-Bank (LRB) owns a 6% CHF-fixed coupon bond which was issued by the Swiss Novartis Group and is subject of a Repo-Deal. Three months ago the bank closed the Repo-Deal which originally had a maturity of six months. 1. Please name the risk which is hedged by Repo Deal. 2. Please name two risks which are related to the above mentioned bond. 3. Select one risk of the above mentioned bond and name one means/financial instrument in order to hedge the selected risk. 4. Briefly describe the events or actions which a. Took place three months ago, b. will take place in three months.traditional yield management strategies are most appropriate when? A. The service providers has a homogeneous target market B. Its target market is not price sensitive C. All members of the target market arrive at basically the same time D. Those who arrive early or reserve early are more price sensitive than those who reserve or arrive late E. All of the target market is equally price sensitive
- Define the term Expected return on a risky asset?This refers to the premium to compensate investors for not having to convert their investments into cash. *a. None of the choicesb. Default Risk Premiumc. Liquidity Risk Premiumd. Maturity Risk Premiume. Special Characteristics PremiumQuestion 2: Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). Draw the security market line (SML) Use the CAPM to calculate the required return, on asset A. Assume that as a result of recent economic events, inflationary expectations have declined by 3%, lowering RF and RM to 5% and 9%, respectively. Draw the new SML on the axes in part a, and calculate and show the new required return for asset A. Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 2%, to be14%. Ignoring the shift in part c, draw the new SML on the same set of axes that you used before, and calculate and show the new required return for asset A. From the previous changes, what conclusions can be drawn about the impact of (1) decreased inflationary expectations and (2) increased risk aversion on the required returns of risky assets?