Pearson eText Foundations of Finance -- Instant Access (Pearson+)
10th Edition
ISBN: 9780135639382
Author: Arthur Keown, John Martin
Publisher: PEARSON+
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Chapter 2, Problem 4MC
Summary Introduction
Case Summary:
During the period of summer internship, person X have been assigned to work with chief financial officer (CFO) of company S incorporation. The CFO decided to assess person X’s understanding of interest rates. Particularly, the CFO asked to provide reasonable
To determine: The default risk premium.
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Explain the relation between current and future expected one-year bond yields and the yield on a five-year bond.
The maturity risk premium is a function of the default risk premium and the number of years for the security to mature. The applicable risk-free rate component of 5-year securities is 7.5%. Default risk premium is 1.5%. Determine the nominal rate of the long-term 5-year government security. (In percentage)
The yield to maturity for a one-year discount bond equals
the increase in price over the year, divided by the initial price.
the increase in price over the year, divided by the face value.
the increase in price over the year, divided by the interest rate.
none of the above.
Chapter 2 Solutions
Pearson eText Foundations of Finance -- Instant Access (Pearson+)
Ch. 2 - Prob. 1RQCh. 2 - Prob. 2RQCh. 2 - Prob. 3RQCh. 2 - Prob. 4RQCh. 2 - Prob. 5RQCh. 2 - Prob. 6RQCh. 2 - Prob. 7RQCh. 2 - Prob. 8RQCh. 2 - Prob. 9RQCh. 2 - Prob. 10RQ
Ch. 2 - Prob. 11RQCh. 2 - Prob. 12RQCh. 2 - Prob. 13RQCh. 2 - Prob. 14RQCh. 2 - Prob. 15RQCh. 2 - Prob. 1SPCh. 2 - Prob. 2SPCh. 2 - Prob. 3SPCh. 2 - Prob. 4SPCh. 2 - Prob. 5SPCh. 2 - Prob. 6SPCh. 2 - Prob. 7SPCh. 2 - Prob. 8SPCh. 2 - Prob. 9SPCh. 2 - Prob. 10SPCh. 2 - Prob. 11SPCh. 2 - (Interest rate determination) Youre looking at...Ch. 2 - Prob. 13SPCh. 2 - (Yield curve) If yields on Treasury securities...Ch. 2 - (Unbiased expectations theory) Currently you have...Ch. 2 - Prob. 2MCCh. 2 - Prob. 3MCCh. 2 - Prob. 4MCCh. 2 - Prob. 5MC
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- What do you have to do to the interest rate and years of maturity if a bond pricing problem tells you that interest is compounded quarterly?arrow_forwardThe three-year interest rate is 7.40% and the four-year interest rate is 8.6%. The liquidity premium for three-year and four-year bonds are 0.40 and 0.60 respectively. Calculate the adjusted forward rate forecast for three-year periods in the futurearrow_forwardA Treasury bill matures in 81 days and has a bond equivalent yield of 2.79 percent. What is the effective annual rate (EAR)? What is the EAR if the Treasury bill matures in 8.523 months with a bond equivalent yield of 1.113%?arrow_forward
- A bond has a yield to maturity of 9.28 percent. If the inflation rate is 2.0 percent, what is the real rate of return on the bond?arrow_forwardGiven the following data, find the expected rate of inflation during the next year. r = real risk-free rate= 2.20%. Maturity risk premium on 10-year T-bonds = 2%. It is zero on 1-year bonds, and a linear relationship exists. Default risk premium on 10-year, A-rated bonds = 1.5%. Liquidity premium = 0%. Going interest rate on 1-year T-bonds = 4.80%. 3.0% 2.2% 2.8% 2.6% O 2.4%arrow_forwardThe interest rate on five-year Treasury bonds is 3.1 percent, the rate on six-year T-bonds is 2.9 percent, and the rate on seven-yearT-bonds is 2.6 percent. Using the expectations theory, compute the expected one-year interest rates in (a) Year 6 only and (b) Year 7 only.arrow_forward
- Please see attached. Definitions: Yield to maturity (YTM) is the return the bond holder receives on the bond if held to maturity. Treasury note is a U.S. government bond with a maturity of between two and ten years. Current yield is the annual bond coupon payment divided by the current price.arrow_forwardSuppose the yield on a one year bond is currently 2.5%. Further assume that the expected yield on a one-yea the next four years are, respectively: 2.4%, 2.3%, 2.2%, and 2.1%. Additionally, the term premium on the one-, three-, four-, and five-year bonds are given in the table below: Term Premium on Different Maturity Length Bonds Maturity Length Term Premium one-year 0.00% two-year three-year four-year five-year a. b. flat 0.05% Given the information above, if the yield curve of these five bonds were graphed, it would be 0.10% e. 0.15% downward sloping upward sloping 0.20% C. flat then upward sloping d. upward sloping then downward slopingarrow_forward5-year Treasury bonds yield 3.6%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?arrow_forward
- 5-year Treasury bonds have a nominal yield of 1.80%. The inflation premium (IP) is 2.09%, and the maturity risk premium (MRP) on 5-year bonds is 1.56%. What is the real risk-free rate, r*? O 5.45% O 3.65% -1.85% 01.85% 3.89%arrow_forwardThe yield on a 10-year bond is 7%. The 30-day T-bill yield is 2.5%, while the inflation rate is estimated to be 2.3%. What is the real rate of return on the bond based on the exact Fisher Effect formula?arrow_forwardThe following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of the face value): a. Compute the yield to maturity for each bond. b. Plot the zero-coupon yield curve (for the first five years). c. Is the yield curve upward sloping, downward sloping, or flat? a. Compute the yield to maturity for each bond. The yield on the 1-year bond is 3.92 %. (Round to two decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Maturity (years) Price (per $100 face value) 1 $95.51 2 3 $91.10 $86.55 $81.69 $76.45 Print Dondayarrow_forward
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