EP ECONOMICS,AP EDITION-CONNECT ACCESS
20th Edition
ISBN: 9780021403455
Author: McConnell
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Question
Chapter 35, Problem 8RQ
To determine
The average expected rate of return on the market portfolio.
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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
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…
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 35 Solutions
EP ECONOMICS,AP EDITION-CONNECT ACCESS
Ch. 35 - Prob. 1DQCh. 35 - Prob. 2DQCh. 35 - Prob. 3DQCh. 35 - Prob. 4DQCh. 35 - Prob. 5DQCh. 35 - Prob. 6DQCh. 35 - Prob. 7DQCh. 35 - Prob. 8DQCh. 35 - Prob. 9DQCh. 35 - Prob. 10DQ
Ch. 35 - Prob. 11DQCh. 35 - Prob. 12DQCh. 35 - Prob. 1RQCh. 35 - Prob. 2RQCh. 35 - Prob. 3RQCh. 35 - Prob. 4RQCh. 35 - Prob. 5RQCh. 35 - Prob. 6RQCh. 35 - Prob. 7RQCh. 35 - Prob. 8RQCh. 35 - Prob. 9RQCh. 35 - Prob. 10RQCh. 35 - Prob. 1PCh. 35 - Prob. 2PCh. 35 - Prob. 3PCh. 35 - Prob. 4PCh. 35 - Prob. 5PCh. 35 - Prob. 6P
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