Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 12, Problem 12QP
Summary Introduction
To determine: The relationship between the Treasury bills rate and inflation rate.
Introduction:
Treasury bills are debt instruments issued by the government for raising money. The investors consider Treasury bills investment as risk-free investment. It is because there is no default risk on Treasury bills, and the interest rate risk is very low. Inflation refers to a situation where the prices of goods rise in the economy. It reduces the
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Students have asked these similar questions
Suppose that the US price index is 100.0 in 1985 and 216.4 in 2015 (30 years). What is the average annual rate of inflation from 1985 and 2015 in the US?
2.61%
116.4%
16.4%
1.64%
None of the above
which one is correct please confirm?
QUESTION 21
If the return on U.S. Treasury bills is 7.02%, the risk premium is 2.32%, and the inflation rate is 4.16%, then the real rate of return is ____.
a.
7.02%
b.
6.48%
c.
4.70%
d.
2.86%
82. “It took Paul Volker, who became Fed chairman in 1979, to put the monetarist theory into practice, adopting money-supply targets that drove interest rates to double-digit levels, sent the economy into a deep recession, and ultimately brought inflation down.†What is this monetarist theory?inflation is always and everywhere a monetary phenomenonthe main determinant of the inflation rate is the rate of growth of the money supplyinflation can be controlled by controlling money growthall of the above1. “Earlier in the week the central bank’s traders intervened aggressively in the money market to push the yield on last week’s Treasury bills sharply higher.”What kind of intervention is being referred to? The central banka) sold bills b) bought billsc) announced an easier monetary policy d) raised the legal reserve requirement2. “Several government bond issues will raise $400 million, with the central bank picking up at least…
Chapter 12 Solutions
Fundamentals of Corporate Finance
Ch. 12.1 - Prob. 12.1ACQCh. 12.1 - Why are unrealized capital gains or losses...Ch. 12.1 - What is the difference between a dollar return and...Ch. 12.2 - Prob. 12.2ACQCh. 12.2 - Why doesnt everyone just buy small stocks as...Ch. 12.2 - What was the smallest return observed over the 88...Ch. 12.2 - About how many times did large-company stocks...Ch. 12.2 - What was the longest winning streak (years without...Ch. 12.2 - How often did the T-bill portfolio have a negative...Ch. 12.3 - Prob. 12.3ACQ
Ch. 12.3 - What was the real (as opposed to nominal) risk...Ch. 12.3 - Prob. 12.3CCQCh. 12.3 - What is the first lesson from capital market...Ch. 12.4 - In words, how do we calculate a variance? A...Ch. 12.4 - With a normal distribution, what is the...Ch. 12.4 - Prob. 12.4CCQCh. 12.4 - What is the second lesson from capital market...Ch. 12.5 - Prob. 12.5ACQCh. 12.5 - Prob. 12.5BCQCh. 12.6 - What is an efficient market?Ch. 12.6 - Prob. 12.6BCQCh. 12 - Chase Bank pays an annual dividend of 1.05 per...Ch. 12 - The risk premium is computed as the excess return...Ch. 12 - Prob. 12.4CTFCh. 12 - Prob. 12.5CTFCh. 12 - Prob. 12.6CTFCh. 12 - Investment Selection [LO4] Given that Fannie Mae...Ch. 12 - Prob. 2CRCTCh. 12 - Risk and Return [LO2, 3] We have seen that over...Ch. 12 - Market Efficiency Implications [LO4] Explain why a...Ch. 12 - Efficient Markets Hypothesis [LO4] A stock market...Ch. 12 - Semistrong Efficiency [LO4] If a market is...Ch. 12 - Efficient Markets Hypothesis [LO4] What are the...Ch. 12 - Stocks versus Gambling [LO4] Critically evaluate...Ch. 12 - Efficient Markets Hypothesis [LO4] Several...Ch. 12 - Efficient Markets Hypothesis [LO4] For each of the...Ch. 12 - Calculating Returns [LO1] Suppose a stock had an...Ch. 12 - Calculating Yields [LO1] In Problem 1, what was...Ch. 12 - Prob. 3QPCh. 12 - Prob. 4QPCh. 12 - Nominal versus Real Returns [LO2] What was the...Ch. 12 - Bond Returns [LO2] What is the historical real...Ch. 12 - Prob. 7QPCh. 12 - Risk Premiums [LO2, 3] Refer to Table 12.1 in the...Ch. 12 - Calculating Returns and Variability [LO1] Youve...Ch. 12 - Calculating Real Returns and Risk Premiums [LO1]...Ch. 12 - Calculating Real Rates [LO1] Given the information...Ch. 12 - Prob. 12QPCh. 12 - Prob. 13QPCh. 12 - Calculating Returns and Variability [LO1] You find...Ch. 12 - Arithmetic and Geometric Returns [LO1] A stock has...Ch. 12 - Arithmetic and Geometric Returns [LO1] A stock has...Ch. 12 - Using Return Distributions [LO3] Suppose the...Ch. 12 - Prob. 18QPCh. 12 - Distributions [LO3] In Problem 18, what is the...Ch. 12 - Blumes Formula [LO1] Over a 40-year period an...Ch. 12 - Prob. 21QPCh. 12 - Calculating Returns [LO2, 3] Refer to Table 12.1...Ch. 12 - Using Probability Distributions [LO3] Suppose the...Ch. 12 - Using Probability Distributions [LO3] Suppose the...Ch. 12 - Prob. 1MCh. 12 - Prob. 2MCh. 12 - Prob. 3MCh. 12 - Prob. 4MCh. 12 - A measure of risk-adjusted performance that is...Ch. 12 - Prob. 6M
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Similar questions
- Q1) It is highly likely that the projected retirement income based on the replacement ratio method may not be sufficient to pay for retirement expenses if inflation rates are _________ wage growth rates.arrow_forwardWhich one is correct answer please confirm? Q1: If the return on U.S. Treasury bills is 7.02%, the risk premium is 2.32%, and the inflation rate is 4.16%, then the real rate of return is ____. a. 2.86% b. 7.02% c. 4.70% d. 6.48%arrow_forwardwhich one is correct answer please confirm? Q23: The real rate of interest is expected to be 3%, and the expected rate of inflation for next year is expected to be 5.5%. If the default risk premium is 1.1 percentage points, and the seniority risk premium is 0.4 percentage points, what is the required return on a 1-year U.S. Treasury security? a. 9.6% b. 10.0% c. 8.9% d. 8.5%arrow_forward
- #68 The risk-free rate is 3.7%, and expected inflation is 2.4%. If inflation expectations change such that future expected inflation falls to 2.1%, what will the new risk-free rate be?arrow_forwardUse the Taylor Rule to predict the Fed’s target for the Federal funds rate in the following situations: (LO4) a. Inflation is 3%, which is 1% above the target; output growth is 4%, which is 1% above potential. b. Inflation is 2%, which is the target rate; output growth is 4%, which is 1% above potential. c. Inflation is 1%, which is 1% below the target; output growth is 2%, which is 1% below potential.arrow_forwardQUESTION 1Everything else equal, the Phillips-curve in a country will shift upwards when the unemployment rate fallsthe central bank cuts interest ratesoil prices risethe government reduces tax rates on labour QUESTION 2Consider a country with a flexible exchange rate. If the central bank of this country raises its interest rate by 0.5%-points, whereas observers had anticipated an increase of only 0.25%-points, one can expect that: Bond prices and stock prices rise, the country’s currency depreciatesBond prices rise, stock prices fall, the country’s currency appreciatesBond prices fall, stock prices rise, the country’s currency depreciatesBond prices and stock prices fall, the country’s currency appreciates QUESTION 3We asked five students to give us three possible sources of an increase of the monetary base in the economy. Only one of the students came up with a completely correct list. This list included: an increase in central bank lending to banks, a purchase of…arrow_forward
- Q16 Inflation brings downward changes in the purchasing power of monetary unit and the prices do not continuously rise in it. a. The above mentioned fact is true about inflation b. The above mentioned fact is about motivation. c. All options are correct d. The above mentioned fact is false about inflationarrow_forwardAll other things being equal, which of the following would cause interest rates to rise? a. The economy slides into a recession. b. The federal government's budget deficit declines. c. The rate of inflation decreases. d. The Federal Reserve contracts the money supply.arrow_forward20 Which of the following is the positive impact of inflation? Inflation makes debtors pay less in real return. Fixed-income people have the same income but a high cost of living. A lender will not have the option to earn interest. Inflation causes the real value of saving for a saving person to eroded.arrow_forward
- Which of the following would have inflationary effect on the economy? [1] BSP releasing new bonds in the market [2] BSP decreasing the repo rate [3] BSP increasing the bank rate. * A.) 1 only B.) 2 only C.) 1 and 2 D.) 2 and 3arrow_forward1. The price of an item in 2004 was $1.3. Use an inflation rate of 4% to calculate its price in 2030.arrow_forwardPandemic has caused higher unemployment rate and lower growth in GDP. Federal Reserve wants to buy more 1-year and 10-year Treasury securities and sell 5-year Treasury securities to stimulate the economy. What would be shape of Treasury yield curve as a result of this move by Fed? Explain this yield curve using appropriate theory of term structure.arrow_forward
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