You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.2%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:Inflation premium = 3.00%Liquidity premium = 0.7%Maturity risk premium = 1.40%Default risk premium = 2.00%On the basis of these data, what is the real risk-free rate of return? Round your answer to two decimal places.

Risk free rate of return is the return which an investor earns by investing the money in risk free…

Answered: what is the real risk-free rate of…

Business

Finance

what is the real risk-free rate of return? Round your answer to two decimal places.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 10P

See similar textbooks

Related questions

Q: problems should be solved by using a financial calculator or MS excel spreadsheet. Accordingly, you…

A: Price of a bond is given nothing but the present value of its coupon payments and the principal…

Q: The real risk-free rate of interest, r*, is 4 percent, and it is expected to remain constant over…

A: A Bond refers to an instrument that represents the loan being made by the investor to the company…

Q: The real risk-free rate is 2.36%, inflation is expected to be 4.75% this year, and the maturity risk…

A: Risk free rate = 2.36% Inflation rate = 4.75% Maturity risk premium = 0%

Q: Based on the following data, calculate an expected price and standard deviation. (Face value= 1,000…

A: Here,

Q: are a financial manager and you have bonds worth $3,000,000 in your portfolio which have a 7 percent…

Q: The real risk-free rate, r*, is 4.5%, and it is expected to remain constant over time. Inflation is…

A: The question is based on the concept to calculate the interest rate of a bond based on risk premium.…

Q: A bond with a face value of $1,000 has 10 years until maturity, carries a coupon rate of 7.7%, and…

A: Face Value = 1000 Time Period of Bond = 10 years Coupon = Coupon Rate * Face Value = 7.7% * 1000 =…

Q: In January 2008, you purchased a XYZ bond with 9 years until maturity. The bond has an annual coupon…

A: “Since you have posted a question with multiple sub-parts, we will solve first three subparts for…

Q: Your good friend is looking to buy a bond that pays semi-annual interest. The par value is $1,000…

A: Computation of bond price:Hence, the recommended bond price will be $1,085.84.

Q: What is the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is…

A: Information Provided: Term = 15 years Real risk free rate = 2.8% Inflation (Two years) = 3%…

Q: Suppose investors can earn a return of 2% per 6 months on a Treasury note with 6 months remaining…

A: Calculation of selling price of T-bill: Answer: The selling price of 6-month maturity Treasury bill…

Q: Suppose we want to do a repo on a 1,000,000 (in par value) Treasury bond for 30 days. The bond's…

A: The annual percentage rate is the term used to describe the interest rate on a loan (APR). A lender…

Q: Consider a long forward contract to purchase a coupon-bearing bond whose current price is $910. We…

A: Forward contract as the name suggests is not related to the present scenario. It means the buying…

Q: ou read in The Wall Street Journal that 30-day T-bills are currently yielding 4.5%. Your…

A: The real risk-free rate of return is the return that is received on the risk free assets over the…

Q: Suppose that discount bond prices are as follows: 2 4. P 0.9525 0.899 0.838 0.760 0.05 0.065 0.054…

A: A forward contract refers to a contract that allows the parties to buy or sell an asset on a future…

Q: Based on the pure expectations theory, is the following statement true or false? A certificate of…

A: Since more than three sub-parts are posted at a time. The answer for first three sub-parts is only…

Q: Suppose you bought a bond with an annual coupon rate of 7.8 percent one year ago for $901. The bond…

A: Here, To Find: Part a. Total dollar return =? Part b. Total nominal rate of return =? Part c. Total…

Q: The real risk-free rate (r*) is 2.80% and is expected to remain constant into the future. Inflation…

A: Given information: Real risk free rate is 2.80% Inflation is expected to be 4.05% for next three…

Q: Suppose that you buy a TIPS (inflation-indexed) bond with a 1-year maturity and a coupon of 2% paid…

A: Face Value of Bond = $1,000Coupon Rate = 2% or 0.02Inflation Rate = 10% or 0.10Time to Maturity = 1…

Q: You have just been offered a bond for $880.10. The coupon rate is 7 percent payable annually, and…

A: Using excel NPER function

Q: One year ago you bought a $10,000, 4-year Government of Canada Treasury Bill (discount bond) at the…

A: Solution:- The current market price of a bill means the price at which a bill is trading in the…

Q: The real risk-free rate is 2.08%, inflation is expected to be 6.17% this year, and the maturity risk…

A: Real risk free rate = 2.08% Inflation rate = 6.17% Maturity risk premium = 0%

Q: Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. Today…

A: Expectation theory states that short term interest rates are dependent on long term rates, if no…

Q: You are employed by an investment bank to estimate the value of a coupon-paying bond with the…

A: Solution:- Market value of the bond = Present value of coupon amounts receivable from bond at yield…

Q: On the basis of the information that John has collected, what estimate can he make of the real rate…

A: Real interest rate (constant dollar interest rate) refers to those interest rate of the company…

Q: You read in The Wall Street Journal that 30-day T-bills are currentlyyielding 5.8%. Your…

A: A rate of minimum return that is required by an investor without any risk of losing the money due to…

Q: 5 Year Treasury Notes are currently yielding 5.50%, and you have found the following interest…

A: Introduction: Inflation premium 3.00% Liquidity premium 0.00% Default risk premium 0.00% Maturity…

Q: Suppose that for a price of $960 you purchase a 7-year Treasury bond that has a face value of $1,000…

A: Rate of Return = Coupon + Capital AppreciationTotal Investmentx100

Q: Suppose you bought a bond with an annual coupon of 7 percent one year ago for $970. The bond sells…

A: Real Rate of Return= [(1+Nominal)/(1+Inflation)]-1

Q: The following information was gathered by a security analyst. The real rate of interest is 4% and is…

A: Hi There, Thanks for posting the questions. As per our Q&A guidelines, must be answered only one…

Q: For the following questions, assume the normal case that coupon payments are semi-annual. a. What is…

A: Face Value of Bond = 1000 Time Period of Bond = N = 10 years Bond Price = 1000 Coupon Rate = 5.3%…

Q: You read in The Wall Street Journal that 30-day T-bills are currently yielding 4.7%. Your…

A: The current yield on 30-day T-bills is 4.7% and real risk-free rate of return is the rate after…

Q: The real risk-free rate is 3.55%, inflation is expected to be 3.60% this year, and the maturity risk…

A: Risk free rate = 3.55% Inflation expected = 3.60%

Q: You read in The Wall Street Journal that 60-day T-bills are currently yielding 9.5%. Your…

A: As there is no probability of loss in these type of risk free rate thus it is free from any kind of…

Q: Suppose your friend is debating purchasing a bond that has a $1,000 par value, 13 years to maturity,…

A: To Find: Yield to maturity Value of bond after 3 years

Q: The real risk-free rate is 4%, and the annual inflation rate is expected to be 2% next year, 3% in…

A: Calculation of Maturity Risk Premium:The maturity risk premium for 3-year security is 2.67%.Excel…

Q: On the basis of these data, the real risk-free rate of return is 3% 2% 0% 1%

A: Real risk-free rate refers to the rate of interest that is expected by the investors on the…

Q: Suppose that you bought a 14% Drexler bond with time to maturity of 9 years for $1,379.75…

A: Here, As the Face Value of the Bond is not given in the question, we are assuming it to be $1,000.…

Q: For the following questions, assume the normal case that coupon payments are semi-annual. a. What is…

A: N = 12 years Coupon Rate = 6.2% Price = 1000 Face Value = 1000

Q: Suppose that an analyst wants to compare a 13-week T-bill quoted at a discount rate of 2.40% for a…

A: Number of days in year = 360 T Bill Time Period (N) = 13 weeks i.e. 13*7 = 91 days Discount Rate =…

Q: A trader, Peter, buys a treasury note with a face value of 1000, which will mature in 180 days.…

A: Treasury notes is a debt financial instrument that offers stable interest rates. It is issued for…

Q: An insurance company must make payments to a customer of £10 million in one year and £4 million in…

A: Bonds are the long-term financing measures to create debt. Interest (coupon) is paid periodically on…

Q: Suppose you bought a bond with an annual coupon rate of 8.9 percent one year ago for $912. The bond…

A: Bond is a financial instrument that is loan to business and its pays the fixed return to investors.

Q: Suppose you bought a bond with an annual coupon rate of 8.4 percent one year ago for $960. The bond…

A: Total dollar return = [current bond price - last year price + coupon payment] = [$960 - $960 +…

Q: 5 Year Treasury Notes are currently yielding 6.00%, and you have found the following interest…

A: The real risk-free rate is the rate of return of an investment without any risk. This is the return…

Q: You read in The Wall Street Journal that 30-day T-bills are currently yielding 4%. Your…

A: Treasury bills (T-bills) are a kind of short term debt that is issued by the government with the aim…

Concept explainers

Interest Rate

When you deposit your money with the bank, the deposit earns you some extra money at the end of the specific period – something more than what you deposited. That amount of money that the bank pays you for keeping the money with the bank is the “interest” and the percentage at which the bank pays you for your amount is called the “interest rate”.

Question

You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.2%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:

Inflation premium = 3.00%
Liquidity premium = 0.7%
Maturity risk premium = 1.40%
Default risk premium = 2.00%

On the basis of these data, what is the real risk-free rate of return? Round your answer to two decimal places.

Definition Definition Percentage gain or loss from a specific investment over time. The rate of return is the difference between the closing and initial values of an investment divided by the initial value of the investment. The closing value includes any intermediate cash flows such as dividends or interest amounts.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: INTRODUCTION

VIEW

Step 2: SOLUTION

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for 1,135.90, producing a nominal yield to maturity of 8%. However, the bond can be called after 5 years for a price of 1,050. (1) What is the bonds nominal yield to call (YTC)? (2) If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?
What would be the value of the bond described in Part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we now have a discount or a premium bond? What would happen to the bond’s value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond? What would happen to the value of the 10-year bond over time if the required rate of return remained at 13%? If it remained at 7%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N, and then change N to see what happens to the PV as the bond approaches maturity.)
Your client has decided that the risk of the bond portfolio is acceptable and wishes to leave it as it is. Now your client has asked you to use historical returns to estimate the standard deviation of Blandy’s stock returns. (Note: Many analysts use 4 to 5 years of monthly returns to estimate risk, and many use 52 weeks of weekly returns; some even use a year or less of daily returns. For the sake of simplicity, use Blandy’s 10 annual returns.)
You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.0%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums: Inflation premium = 3.50% Liquidity premium = 0.6% Maturity risk premium = 1.85% Default risk premium = 2.15% On the basis of these data, what is the real risk-free rate of return? Round your answer to two decimal places.
You read in The Wall Street Journal that 60-day T-bills are currently yielding 9.5%. Your brother-in-law, a broker, has given you the following estimates of current interest rate premiums: Inflation premium = 6.5%. Liquidity premium = 1.15%. Maturity risk premium = 2.50%. Default risk premium = 2.22%. On the basis of these data, the real risk-free rate of return is?
You read in The Wall Street Journal that 30-day T-bills are currentlyyielding 5.8%. Your brother-in-law, a broker at Safe and Sound Securities, has given you thefollowing estimates of current interest rate premiums:Inflation premium = 3.25%Liquidity premium = 0.6%Maturity risk premium = 1.85%Default risk premium = 2.15%On the basis of these data, what is the real risk-free rate of return?
The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.10 percent, and the 6-year Treasury rate is 7.35 percent. From discussions with your broker, you have determined that expected inflation premium is 2.60 percent next year, 2.85 percent in Year 2, and 3.05 percent in Year 3 and beyond. Further, you expect that real interest rates will be 3.55 percent annually for the foreseeable future. What is the maturity risk premium on the 6-year Treasury security?
5 Year Treasury Notes are currently yielding 5.50%, and you have found the following interest premium that relate to this investment. Inflation premium 3.00% Liquidity premium 0.00% Default risk premium 0.00% Maturity risk premium 1.25% Given the above information, what is the real risk rate of return?
A fixed income analyst has made the following assessments: The risk-free rate is expected to remain at 2.5% for the next 10 year. Inflation is expected to be 3% this year, 4% next year and 5% a year thereafter. The maturity risk-premium is 0.1% (t-1), where t= maturity of the bond. A 5-year corporate bond currently yield 8.5 percent. What will be the yield on the bond one year from now, if the above assessments are correct, and the bond's default premium and liquidity premium remain unchanged?
5 year treasury notes are currently yielding 5.75%, and you have found the following interest premium that relate to this investment. Inflation premium 2.50% Liquidity premium 0.00% Default risk premium 0.00% Maturity risk premium 2.00% Given the above information, what is the real risk free rate of return?
The 30-day T-bill yield is currently 3.10%. You also know that the inflation premium today is 1.80%, the liquidity premium is 0.25%, the maturity risk premium is 0.33% for bonds with 5 years to maturity, and the default risk premium on corporate bonds is averaging about 2.07%. What is the real risk-free rate of return?
problems should be solved by using a financial calculator or MS excel spreadsheet. Accordingly, you must show the values of all relevant time valu of money variables Columbus Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 30 years. Their nominal yield to maturity is 10%, they pay interest quarterlly, and they sell at a price of $980. What is the bond's annual coupon interest rate?