You are given the following long-run annual rates of return for alternative investment instruments: U.S. Government T-bills 3.50% [0.0048] Large-cap common stock 11.75 [ ] Long-term corporate bonds 5.50 [ ] Long-term government bonds 4.90 [ ] Small-capitalization common stock 13.10 [ ] The annual rate of inflation during this period was 3 percent. Compute the real rate of return on these investment alternatives.

You are given the following long-run annual rates of return for alternative investment instruments: U.S. Government T-bills 3.50% [0.0048] Large-cap common stock 11.75 [ ] Long-term corporate bonds 5.50 [ ] Long-term government bonds 4.90 [ ] Small-capitalization common stock 13.10 [ ] The annual rate of inflation during this period was 3 percent. Compute the real rate of return on these investment alternatives.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 9P

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Assume that the consensus required rate of return on common stocks is 13 percent. In addition, you read in Fortune that the expected rate of inflation is 6 percent and the estimated long-term real growth rate of the economy is 3 percent. What interest rate would you expect on U.S. government T-bills? Round your answer to two decimal places.
Due to the integrated nature of their capital markets, investors in both the U.S. and U.K. require the same real interest rate, 2.6%, on their lending. There is a consensus in capital markets that the annual inflation rate is likely to be 2.4% in the U.S. and 2.6% in the U.K. for the next three years. The GBP/USD rate is currently 1.3054. Compute the nominal interest rate per annum in the U.S.., assuming that the Fisher effect holds. (X.XX%)
If expected inflation in the U.S. is 8%, expected inflation in France is 12%, and the one-year risk-free rate in the U.S. is 4%, what would the one-year risk-free rate have to be in France for real interest rate parity to hold? A company has total book value of common stock equal to $650000, a par value of $1 per share, 150000 shares issued and outstanding, and the market value of the common stock is $85 a share. a. What is the company's additional paid-in capital? b. What is the market capitalization?
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?
The market has an expected rate of return of 11.6 percent. The long-term government bond is expected to yield 4.8 percent and the U.S. Treasury bill is expected to yield 1.0 percent. The inflation rate is 3.2 percent. What is the market risk premium? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
In 2020, the US 10-year Treasury Note yield stood at a nominal .7% and taking into account an expected inflation rate of 1.6% meant that the real yield was negative. In such a case, the negative yield may provide incentive for many investors to a. buy stocks b. undertake more risky investments (relative to buying US Treasuries) c. bid down the value of the US $ by buying foreign developed country bonds d. All of the above
a. The spot price of the British pound is currently $1.50. If the risk-free interest rate on 1-year government bonds is 1% in the United States and 2% in the United Kingdom, what must be the forward price of the pound for delivery one year from now?b. How could an investor make risk-free arbitrage profits if the forward price were higher than the price you gave in answer to part (a)? Give a numerical example.
The expected return on a share of ExxonMobil stock in the U.S. is 15.6% while the expected return on a share of Royal Dutch Shell stock is 12.6% in the Netherlands. If the pure rate of return is 2% in both countries and the required risk premium is 6% for each company's stock, what is the long-term expected inflation rate in each country if the multiplicative form of the Fisher model is used in making the calculations?
Is the 10-year US Government bond rate currently outperforming the 3-month US Government rate. If so, what does this mean? what is the bond market’s prediction for the future level of economic activity? Is its prediction weaker or stronger than that of the stock market?
Suppose that the return on a U.K. treasury bill is eight percent annum and the return on a U.S. treasury bill is eight percent annum and that you had $1,000,000 earmarked for short term investment for a period of a month. In which of the securities would you place your money? (Assume you are not a speculator). Show your calculations. 1 British pound (spot) $1.7748 1 British pound (30-day futures) $1.7776
A financial institution owns a portfolio of options dependent on the US Dollar Sterling exchange rate. The delta of the portfolio with respect to percentage changes in the exchange rate is 7.3. If the daily volatility of the exchange rate is 0.5% and a linear model is assumed, calculate the estimated 10-day 95% VaR for the portfolio.
According to the international Fisher effect, if U.S. investors a 3% rate of inflation in European countries that use the euro and expect a 4% rate of domestic inflation over one year, and, and require a 2% real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be: -2% 6% 8% 3% 4%

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U.S. Government T-bills	3.50% [0.0048]
Large-cap common stock	11.75 [ ]
Long-term corporate bonds	5.50 [ ]
Long-term government bonds	4.90 [ ]
Small-capitalization common stock	13.10 [ ]