CNCT ACC CORPORATE FINANCE
12th Edition
ISBN: 9781264604081
Author: Ross
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Textbook Question
Chapter 10, Problem 24QAP
Using Return Distributions Suppose the returns on long-term government bonds are
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Suppose the returns on long-term government bonds are normally distributed. Assume long-term government bonds have a mean return of 6.1 percent and a standard deviation of 9.8 percent.
What is the approximate probability that your return on these bonds will be less than −3.7 percent in a given year? Use the NORMDIST function in Excel® to answer this question.
Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.
What range of returns would you expect to see 95 percent of the time?
Note: A negative answer should be indicated by a minus sign. Enter your answers from lowest to highest. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.
What range would you expect to see 99 percent of the time?
Note: A negative answer should be indicated by a minus sign. Enter your answers from lowest to highest. Do not round intermediate calculations and enter…
A plot of the yields on bonds with different terms to maturity but the same risk, liquidity, and tax
considerations is known as
O A. a yield curve.
B. a risk-structure curve.
OC. a term-structure curve.
5-
O D. an interest-rate curve.
Suppose people expect the interest rate on one-year bonds for each of the next four years to be 3%,
6%, 5%, and 6%. If the expectations theory of the term structure of interest rates is correct, then the
implied interest rate on bonds with a maturity of four years is
nearest whole number).
%. (Round your response to the
2-
Refer to the figure on your right. Suppose the expected interest rates on one-year bonds for each of
the next four years are 4%, 5%, 6%, and 7%, respectively.
1.
1.) Use the line drawing tool (once) to plot the yield curve generated.
3
Term to Maturity in Years
2.) Use the point drawing tool to locate the interest rates on the next four years.
5.
3-
Interest Rate
.....
Quantitative Problem:
Today, interest rates on 1-year T-bonds yield 1.3%, interest rates on 2-year T-bonds yield 2.3%, and interest rates on 3-year T-bonds yield
3.7%.
a. If the pure expectations theory is correct, what is the yield on 1-year T-bonds one year from now? Be sure to use a geometric average in
your calculations. Do not round intermediate calculations. Round your answer to four decimal places.
%
1.3
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b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in
your calculations. Do not round intermediate calculations. Round your answer to four decimal places.
2.4
%
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c. If the pure expectations theory is correct, what is the yield on 1-year T-bonds two years from now? Be sure to use a geometric average in
your calculations. Do not round intermediate calculations. Round your answer to four decimal places.
3.8
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Chapter 10 Solutions
CNCT ACC CORPORATE FINANCE
Ch. 10 - Investment Selection Given that Madrigal...Ch. 10 - Investment Selection Given that Sears was down by...Ch. 10 - Risk and Return We have seen that over long...Ch. 10 - Prob. 4CQCh. 10 - Effects of Inflation Look at Table 10.1 and Figure...Ch. 10 - Risk Premiums Is it possible for the risk premium...Ch. 10 - Prob. 7CQCh. 10 - Returns Two years ago, the Lake Minerals and Small...Ch. 10 - Prob. 9CQCh. 10 - Historical Returns The historical asset class...
Ch. 10 - Prob. 1QAPCh. 10 - Calculating Yields In Problem 1, what was the...Ch. 10 - Calculating Returns Rework Problems 1 and 2...Ch. 10 - Prob. 4QAPCh. 10 - Prob. 5QAPCh. 10 - Prob. 6QAPCh. 10 - Prob. 7QAPCh. 10 - Prob. 8QAPCh. 10 - Prob. 9QAPCh. 10 - Calculating Real Returns and Risk Premiums In...Ch. 10 - Prob. 11QAPCh. 10 - Prob. 12QAPCh. 10 - Prob. 13QAPCh. 10 - Prob. 14QAPCh. 10 - Calculating Returns You bought a stock three...Ch. 10 - Prob. 16QAPCh. 10 - Prob. 17QAPCh. 10 - Prob. 18QAPCh. 10 - Prob. 19QAPCh. 10 - Prob. 20QAPCh. 10 - Prob. 21QAPCh. 10 - Prob. 22QAPCh. 10 - Prob. 23QAPCh. 10 - Using Return Distributions Suppose the returns on...Ch. 10 - Prob. 25QAPCh. 10 - Prob. 26QAPCh. 10 - Using Probability Distributions Suppose the...Ch. 10 - Prob. 28QAPCh. 10 - Prob. 1MCCh. 10 - Prob. 2MCCh. 10 - Assume you decide you should invest at least part...Ch. 10 - Prob. 4MCCh. 10 - Prob. 5MCCh. 10 - What portfolio allocation would you choose? Why?...
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- Quantitative Problem: Today, interest rates on 1-year T-bonds yield 1.7%, interest rates on 2-year T-bonds yield 2.5%, and interest rates on 3-year T-bonds yield 3.4%. a. If the pure expectations theory is correct, what is the yield on 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. c. If the pure expectations theory is correct, what is the yield on 1-year T-bonds two years from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places.arrow_forwardSuppose we observe the following rates: 1R1 = 6.7, 1R2 = 7.4, and E(2r1) = 6.7. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2? Please step by step.arrow_forwardQuantitative Problem: Today, interest rates on 1-year T-bonds yield 1.7%, interest rates on 2-year T-bonds yield 2.3%, and interest rates on 3-year T-bonds yield 3.3%. a. If the pure expectations theory is correct, what is the yield ofb 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places. c. If the pure expectations theory is correct, what is the yield on 1-year T-bonds two years from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places.arrow_forward
- Suppose the interest rate on a 1-year T-bond is 6.3 % and that on a 3 year T-bond is 7.3 %. Assuming the pure expectations theory is correct, what is the market's forecast for 2-year rates 1 year from now? Enter your answer as a percentage and do not use the % symbol.arrow_forwardConsider the following information for a period of years: Arithmetic Mean Long-term government bonds 7.0 % Long-term corporate bonds 7.1 Inflation 4.0 What is the real return on long-term government bonds? ____%arrow_forwardеВook Problem Walk-Through Last year Carson Industries issued a 10-year, 13% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,065 and it sells for $1,200. a. What are the bond's nominal yield to maturity and its nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places. YTM: % YTC: % Would an investor be more likely to earn the YTM or the YTC? -Select- -Select- ent yield and to Table 7.1) Round your answer to two decimal places. b. Since the YTM is above the YTC, the bond is likely to be called. Since the YTC is above the YTM, the bond is likely to be called. Since the YTM is above the YTC, the bond is not likely to be called. Since the YTC is above the YTM, the bond is not likely to be called. Since the coupon rate on the bond has declined, the bond is not likely to be called. I. If the bond is called, the capital gains yield will remain the same but the current yield will be…arrow_forward
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