MACROECONOMICS W/CONNECT
18th Edition
ISBN: 9781307253092
Author: McConnell
Publisher: Mcgraw-Hill/Create
expand_more
expand_more
format_list_bulleted
Question
Chapter 17, Problem 8RQ
To determine
The average expected rate of return on the market portfolio.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
IS-MP Analysis: Interest Rates and Output — End of Chapter Problem
The federal funds rate is 4%, and inflation is 3%. The real interest rate that people can borrow money at is 1.5%.
a. Given the data provided, move the MP curve to the
appropriate position.
Real interest rate (%)
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-5
-4
-3
-2
-1
0
1
2
3
MP curve
4
5
A Company's stock currently pays a dividend of $5 dollars per year and you expect that dividend to grow by 3% every year, forever, such that next year you expect the dividend to be 5.15, to be 5.3045 the year after that, and so on. If your discount rate is 9%, a fair price for this stock today is_____.If your discount rate were to fall to 7%, holding all else the same, the fair price of the stock would increase to_________.
Suppose that, holding yield constant, investors are indifferent as to whether they hold bonds issued by the federal govemment or bonds issued by state and local governments (that is, they consider the bonds the same with respect to default risk, information costs, and liquidity) Suppose that state governments have issued perpetuities (or consoles) with $78 coupons and that the federal govemment has also issued perpetuities with $78 coupons. If the state and federal perpetuites both have after-tax yields of 8%, what are their pre-tax yields? (Assume that the relevant federal income tax rate is 31.13%)
* The pre-tax yield on the state perpetuity will be______________%
* The pre-tax yield on the federal perpetuity will be_______________%
Chapter 17 Solutions
MACROECONOMICS W/CONNECT
Ch. 17 - Prob. 1DQCh. 17 - Prob. 2DQCh. 17 - Prob. 3DQCh. 17 - Prob. 4DQCh. 17 - Prob. 5DQCh. 17 - Prob. 6DQCh. 17 - Prob. 7DQCh. 17 - Prob. 8DQCh. 17 - Prob. 9DQCh. 17 - Prob. 10DQ
Ch. 17 - Prob. 11DQCh. 17 - Prob. 12DQCh. 17 - Prob. 1RQCh. 17 - Prob. 2RQCh. 17 - Prob. 3RQCh. 17 - Prob. 4RQCh. 17 - Prob. 5RQCh. 17 - Prob. 6RQCh. 17 - Prob. 7RQCh. 17 - Prob. 8RQCh. 17 - Prob. 9RQCh. 17 - Prob. 10RQCh. 17 - Prob. 1PCh. 17 - Prob. 2PCh. 17 - Prob. 3PCh. 17 - Prob. 4PCh. 17 - Prob. 5PCh. 17 - Prob. 6P
Knowledge Booster
Similar questions
- Interest rate spread Suppose that a 5-year Treasury bond pays an annual rate of return of 2.9%, and a 5-year bond of the fictional company Risky Investment Inc. pays an annual rate of return of 7.3%. The risk premium on the Risky Investment bond is __________ percentage points. Consider an increase in the annual rate of return on the Risky Investment bond from 7.3 percent to 8.9 percent. Such a change would __________(NARROW/WIDEN) the interest rate spread on the Risky Investment bond over Treasuries to __________ . Which of the following explains the increase in the annual rate of return on the Risky Investment bond? a. The expected default rate on the Risky Investment bond has decreased. b. The expected default rate on the Treasury bond has increased. c. The expected default rate on the Treasury bond has decreased. d.The expected default rate on the Risky Investment bond has increased. NOTE- This is one question but it is divided into…arrow_forwardWhat is the present value of a payment of $5,000 at the end of one year and a second payment of $7,000 at the end of two years if the interest rate is 5 percent? O A. $11,201.84 O B. $11,111.11 O C. $10,985.14 O D. $12,250.32arrow_forwardThe estimated current purchasing price of a discount bond with a face value of $2000 and a yield to maturity of 10% is $ your response to the nearest two decimal place) (Round What is the approximate yield to maturity on a discount bond that matures one year from today with a maturity value of $10,600, and the price today is $9283.67? OA. 83% O B. 14.2% O C. 7% O D. 8.3% OE. 9%arrow_forward
- O If the market interest rate (i) increases today, the Price of a Bond (P) today will decline. The following are correct statements about the impact of Market Interest Rate (i*) on value and return of a typical Coupon Bond, EXCEPT: The YTM of a Bond and the Market Interest Rate (i*) are the same value, even in the Short Term. O For a long term bond, if the Market Interest rate (i*) is expected to increase, the current Price of such Bond will Decline. For a two period Bond, if the Market Interest rate (i*) is expected to increase in the next period, the Expected Total Return (RET) on such bond will decline. Long Term Bonds are considered more risky than Short Term bonds, in part due to the risk associated to changes in future interest rates.arrow_forward5. Suppose that asset returns satisfy this Euler equation: 1 E,0.96(1+r) C2 1 C1 where r denotes the real return from period 1 to period 2 and C is real consumption in the world. Suppose that C1 with probability 0.5. = 1 and that C2 can take on two values, 1.00 and 1.04, each (a) Solve for the world real interest rate, on a one-period, real, discount bond that is free of default risk. (b) Now suppose there is inflation, with Pı interest rate on a one-period, nominal discount bond that is free of default risk. = 1 and P, = 1.04. Solve for the nominal (c) Now imagine an emerging market debt issuer, whose nominal discount bonds pay 1 with probability 1 – A and 0.8 with probability A. Will this debt have a higher expected, real return than the asset you studied above?arrow_forwardIf the discount rate on 3-month commercial paper is 4.9% while the yield on 3-month CDs is 5%, the real difference between them in basis points (in terms of yield) is: (You may need to look up how many basis points there are in a percentage point) Select one: a. 39 O b. 0.39 O c. 0.1 O d. 10 O e. 3.9arrow_forward
- 6. An investor purchases a 30-year U.S. government bond for $840. The bond’s couponrate is 10 percent and, it still had twelve years remaining until maturity. If the investorholds the bond until it matures and collects the $1000 par value from the Treasuryand his marginal tax rate is 25 percent (we assume that the bond is taxable), what willbe his after-tax (effective) yield to maturity? Make sure to show your work.arrow_forwardNeed help. Assume that securitization combined with borrowing and irrational exuberance in Hyperville have driven up the value of asset-backed financial securities at a geometric rate, specifically from $4 to $8 to $16 to $32 to $64 to $128 over a six-year time period. Over the same period, the value of the assets underlying the securities rose at an arithmetic rate from $4 to $6 to $8 to $10 to $12 to $14. If these patterns hold for decreases as well as for increases, by how much would the value of the financial securities decline if the value of the underlying asset suddenly and unexpectedly fell by $6? Instructions: Give your answer as a whole number.arrow_forwardIf Volkswagen, a German company, sells a euro-denominated bond in London, the bond is a O 1) Eurobond. O 2) foreign bond. O 3) currency bond. O 4) Duetsche bond. 5) Maple Bonds 6) Yankees Bondsarrow_forward
- Suppose you net investment at time t (measured in years) is given (in pounds) by I(t) = 500 – 200 | x+1 Which of the following best represents the capital generated between the end of the 2nd year and the end of the 5th year? O a. a. £1361.37 O b. £1678.11 O c. £1544.03 O d. £1242.78arrow_forwardRefer to the figure below to answer the following questions. Real interest rate (percent per year Figure 7.2.2 DLF, DIF 0.5 2.0 1.0 1.5 Loonoble funds (villions of 2007 dollars) G Select one: OA. point F. OB. point G. OC. point H. OD. point /. DIF In Figure 7.2.2, an increase in expected profit will result in a movement from point E to E. either point / or point F. KYSELIN OF EATRAarrow_forwardQUESTION 7 As a recently hired analyst, you are tasked with evaluating your firm's bond portfolo, The first bond you evaluate has a constant payment of $427 per year and the prospectus claims the present value of the bond is $5,008. What is the Interest rate of the bond in question? Submit your answer in percent to the first decimal place, that is, 2.57% = 2.6 or 2.6%arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you