Bundle: Fundamentals of Financial Management, Loose-leaf Version, 15th + MindTap Finance, 1 term (6 months) Printed Access Card
15th Edition
ISBN: 9781337817455
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 6, Problem 2P
Summary Introduction
To identify: The real risk-free return.
Introduction:
Real Risk-Free Rate:
A
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You read in The Wall Street Journal that 30-day T-bills are currently yielding 4.5%. 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 = 0.7%
Maturity risk premium = 2.00%
Default risk premium = 2.75%
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 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?
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You read in The Wall Street Journal that 30-day T-bills are currently yielding 4%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current
interest rate premiums:
· Inflation premium = 3.25%
· Liquidity premium = 0.7%
• Maturity risk premium = 1.85%
· Default risk premium = 2.45%
On the basis of these data, what is the real risk-free rate of return? Round your answer to two decimal places.
%
Chapter 6 Solutions
Bundle: Fundamentals of Financial Management, Loose-leaf Version, 15th + MindTap Finance, 1 term (6 months) Printed Access Card
Ch. 6 - Prob. 1QCh. 6 - Prob. 2QCh. 6 - Suppose you believe that the economy is just...Ch. 6 - Prob. 4QCh. 6 - Suppose a new process was developed that could be...Ch. 6 - Prob. 6QCh. 6 - Prob. 7QCh. 6 - Suppose interest rates on Treasury bonds rose from...Ch. 6 - Prob. 9QCh. 6 - Suppose you have noticed that the slope of the...
Ch. 6 - YIELD CURVES Assume that yields on U.S. Treasury...Ch. 6 - Prob. 2PCh. 6 - Prob. 3PCh. 6 - DEFAULT RISK PREMIUM A Treasury bond that matures...Ch. 6 - MATURITY RISK PREMIUM The real risk-free rate is...Ch. 6 - INFLATION CROSS-PRODUCT An analyst is evaluating...Ch. 6 - EXPECTATIONS THEORY One-year Treasury securities...Ch. 6 - EXPECTATIONS THEORY Interest rates on 4-year...Ch. 6 - EXPECTED INTEREST RATE The real risk-free rate is...Ch. 6 - INFLATION Due to a recession, expected inflation...Ch. 6 - DEFAULT RISK PREMIUM A companys 5-year bonds are...Ch. 6 - Prob. 12PCh. 6 - Prob. 13PCh. 6 - Prob. 14PCh. 6 - EXPECTATIONS THEORY Assume that the real risk-free...Ch. 6 - INFLATION CROSS-PRODUCT An analyst is evaluating...Ch. 6 - Prob. 17PCh. 6 - YIELD CURVES Suppose the inflation rate is...Ch. 6 - Prob. 19PCh. 6 - INTEREST RATE DETERMINATION AND YIELD CURVES a....Ch. 6 - Prob. 21IC
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- 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?arrow_forwardYou read in The Wall Street Journal that 30-day T-bills are currently yielding 9 percent. Your brother- in-law, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums: Inflation premium Liquidity premium Maturity risk premium 2% Default risk premium 2% 5% 1% Based on these data, the real risk-free rate of return is:arrow_forwardSuppose you are considering two possible investment opportunities: a 12-yearTreasury bond and a 7-year, A-rated corporate bond. The current real risk-free rateis 4%, and inflation is expected to be 2% for the next 2 years, 3% for the following4 years, and 4% thereafter. The maturity risk premium is estimated by this formula:MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimatedto be 0.3%. You may determine the default risk premium (DRP), given thecompany’s bond rating, from the table below. Remember to subtract the bond’s LPfrom the corporate spread given in the table to arrive at the bond’s DRP. Whatyield would you predict for each of these two investments?RateCorporate Bond Yieldarrow_forward
- 3b. You read in the Wall Street Journal that 30-day treasury bills are currently yielding 8%. You are informed by a broker the following estimates of current interest rate premium: . Inflation premium = 5% • Liquidity premium = 1% Maturity risk premium = 2% Default risk premium = 2% Disregard cross product terms, i.e., if averaging is required, use the arithmetic average. On the basis of these data, what is the real risk-free rate of return.arrow_forward5 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?arrow_forward5 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?arrow_forward
- 5 Year Treasury Notes are currently yielding 6.00%, and you have found the following interest premium that relate to this investment: • Inflation premium 1.75% • Liquidity premium 0.00% • Default risk premium 0.00% • Maturity risk premium 1.50% Given the above information, what is the real risk-free rate of return?arrow_forwardA nominal risk-free rate is currently 3.5%. A broker at INV Securities, has given you the following estimates of current interest rate premiums: Inflation Premium: 2%, Liquidity Risk Premium 1.5%. Maturity Risk Premium 3%, and Default Risk Premium 1.5%. Based on these data, what are the rates of short-term corporate bonds? O 7.5% O 6.5% 8% 8.5%arrow_forwardIf the loan interest rate is 4 % mark-up on the 6 month treasury bill and the deposit interest rate is 1% mark-up on the 3 month treasury bill, the risk of interest rate like this is called (a) Repricing risk (b) yield -curve risk (c) basis point risk (d) default riskarrow_forward
- If the loan interest rate is 4 % mark-up on the 6 month treasury bill and the deposit interest rate is 1% mark-up on the 3 month treasury bill, the risk of interest rate like this is called Repricing risk yield -curve risk basis point risk default riskarrow_forwardThe following data about the real risk free rate and other risk premiums are gathered:· The real risk free rate is 4%.· Inflation premium is constant at 3.5% in the foreseeable years· Maturity premium is determined using the equation of 0.5%(number of year of maturity).· Liquidity premium is available for all corporate securities at 1.5%.· Default risk is set at 3%.What is the quoted rate on a security issued by the corporations that will mature after 8 years? (In percentage)arrow_forwardA corporate bond has a nominal or observed yield of 9.8%. Your sister, the famouseconomist, has given you the following estimates:Inflation-risk premium = 3.00%Default-risk premium = 2.10%Maturity premium = 1.90%Liquidity premium = 0.50%On the basis of these data, what is the best estimate of the real risk-free rate of return?arrow_forward
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