Concept explainers
a.
To determine: Theaverage expected inflation rate.
Expected Inflation Rate:
The expected inflation rate is the rate at which the price is expected to increase over the time, which results in fall of the purchasing value.
Nominal Rate of Interest:
The nominal rate of interest is the annual rate which is charged on the securities. The nominal annual rate is converted into effective annual rate to compare the rates of two different banks.
b.
To determine: The average nominal interest rate.
c.
To determine: The interest rate in January 1981 on the bonds that has its maturity in 1,2, 5, 10 and 20 years and draw a yield curve on these data.
d.
To explain: The general economic conditions that can lead to an upward sloping yield curve.
e.
To determine: The shape of the yield curve in the given situation and the factors affecting the curve.
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Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
- 1, Consider the following table for an eight-year period: Year T-bill return Inflation 1 7.47% 8.53% 2 8.94 12.16 3 6.05 6.76 4 5.97 5.04 5 5.63 6.52 6 8.54 8.84 7 10.74 13.11 8 13.00 12.34 a, Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period. b, Calculate the standard deviation of Treasury bill returns and inflation over this time period. c, Calculate the real return for each year. d, What is the average real return for Treasury bills?arrow_forwardThe Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) by 25 basis points to 2.50% on the 3rd of March 2020. The reduction in the OPR is intended to provide a more accommodative monetary environment to support the projected improvement in economic growth amid price stability. BNM will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation. The reduction in the OPR came largely in line with economists’ expectations. This is the second cut so far this year. In January, Bank Negara reduced the OPR by 25 basis points to 2.75% -- the lowest since 2011. Two years ago, Malayawata Steel issued RM 100 million worth of ten-year bonds with a face value of RM1,000.00 and a coupon rate of 5%. Coupon payments are made semi-annually. Two years ago, the market yield-to-maturity was 3% pa. Due to the increased insecurity facing the industry, the market yield to maturity is now 7% p.a.…arrow_forwardThe Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) by 25 basis points to 2.50% on the 3rd of March 2020. The reduction in the OPR is intended to provide a more accommodative monetary environment to support the projected improvement in economic growth amid price stability. BNM will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation. The reduction in the OPR came largely in line with economists’ expectations. This is the second cut so far this year. In January, Bank Negara reduced the OPR by 25 basis points to 2.75% -- the lowest since 2011. Two years ago, Malayawata Steel issued RM 100 million worth of ten-year bonds with a face value of RM1,000.00 and a coupon rate of 5%. Coupon payments are made semi-annually. Two years ago, the market yield-to-maturity was 3% pa. Due to the increased insecurity facing the industry, the market yield to maturity is now 7% p.a. a)…arrow_forward
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- For the first time since 2006, the Federal Reserve voted to raise interest rates by a one-quarter percentage point in December 2015. Prior to this increase, interest rates had remained between the 0.00% - 0.25% range, an area called “the zero lower bound.” The Federal Reserve had driven interest rates down that low as a means of helping the economy get back on its feet after the Financial Crisis. The reasoning was that consumers and businesses needed access to loans so that production could turn around. (Consumers take out loans to buy high price items like cars and homes. Businesses use loans as a means of expanding their business. In both instance, more goods will be produced.) The increase in 2015 moved rates to the 0.25% - 0.50% range. As of October 2018, interest rates have moved to 1.00% - 1.25% range. For this discussion board, I want you to do some research into the “Financial Crisis.” Why did it occur? Can you characterize the behavior of the financial sector that led to the…arrow_forwardFind a country that has experienced more than two years of reported negative inflation in the last 10 years, can you suggest why this might have happened?arrow_forwardThe Monetary Policy Committee (MPC) of Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) by 25 basis points to 2.50% on the 3rd of March 2020. The reduction in the OPR is intended to provide a more accommodative monetary environment to support the projected improvement in economic growth amid price stability. BNM will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth andinflation. The reduction in the OPR came largely in line with economists’ expectations. This is the second cut so far this year. In January, Bank Negara reduced the OPR by 25 basis points to 2.75%-- the lowest since 2011. Two years ago, Malayawata Steel issued RM 100 million worth of ten-year bonds with a face value of RM1,000.00 and a coupon rate of 5%. Coupon payments are made semi-annually. Two years ago, the market yield-to-maturity was 3% pa. Due to the increased insecurity facing the industry, the market yield to maturity is now 7% p.a Determine…arrow_forward
- You observe that the current interest rate on short-term U.S. Treasury bills is 4.86 percent. You also read in the newspaper that the GDP deflator, which is a common macroeconomic indicator used by market analysts to gauge the inflation rate, currently implies that inflation is 1.65 percent. What is the approximate real rate of interest on short-term Treasury bills? (Enter your answer as a percent rounded to 2 decimal places.)arrow_forwardSuppose we have the following Treasury bill returns and inflation rates over an eight year period: Year Treasury Bills Inflation 1 10.45% 12.55% 2 11.36 16.00 3 9.06 10.29 4 8.34 7.97 5 8.88 10.29 6 11.23 12.77 7 14.11 16.98 8 15.97 16.90 a. Calculate the average return for Treasury bills and the average annual inflation rate for this period. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Treasury bills % Inflation % b. Calculate the standard deviation of Treasury bill returns and inflation over this period. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Treasury bills % Inflation %…arrow_forward1. Which of the following regarding inflation is true? (a) If CPI changes from 100 to 105 in a year and then changes from 105 to 100 in the following year, then the initial rate of price increase is greater than the following rate of price decrease. (b) If CPI doubles in one year and then remains at that high level for five years, it means that the country suffers high inflation for five years. (c) If CPI is cut by half in one year, it means that the deflation rate of that year is 0.5%. ( d) Increasing CPI means that money is getting more and more valuable. (e) None of the above.arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT