Explanation Solution: The items required for the calculation of actual yield on 7 year Treasury notes are real risk-free rate, maturity risk premium and inflation premium. Compute the inflation premium Given, The inflation of current year is 3%. Inflation of the next year is 4%. Further inflation is 3.5%. Formula to calculate the inflation premium for the 7 year, Inflation Premium = ( Inflation for the Current Year + Inflation for the Next Year + 5 ( Inflation for the Further Years ) ) 7 Substitute 3% for inflation for current year, 4% for inflation for the next year and 3.5% inflation for the further years. Inflation Premium = ( 3 % + 4 % + 5 ( 3.5 % ) ) 7 = 3 % + 4 % + 17.5 % 7 = 24.5 % 7 = 3

Fundamentals of Financial Management (MindTap Course List)

14th Edition

ISBN: 9781285867977

Author: Eugene F. Brigham, Joel F. Houston

Publisher: Cengage Learning

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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…

Question

Chapter 6, Problem 9P

Summary Introduction

To identify: The yield on the 7 year treasury notes.

Yield: Yield is that percentage of the securities at which the return is provided by the company to its investors. Yield can be in the form of dividend and interest.

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Chapter 6 Solutions

Fundamentals of Financial Management (MindTap Course List)

Ch. 6 - Prob. 1Q Ch. 6 - Prob. 2Q Ch. 6 - Suppose you believe that the economy is just...Ch. 6 - Prob. 4Q Ch. 6 - Suppose a new process was developed that could be...Ch. 6 - Prob. 6Q Ch. 6 - Prob. 7Q Ch. 6 - Suppose interest rates on Treasury bonds rose from...Ch. 6 - Prob. 9Q Ch. 6 - Suppose you have noticed that the slope of the...

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Determinant of Interest Rates The real risk-free rate of interest is 4%. Inflation is expected to be 2% this year and 4% during each of the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities?
Current Yield for Annual Payments Heath Food Corporations bonds have 7 years remaining to maturity. The bonds have a face value of 1,000 and a yield to maturity of 8%. They pay interest annually and have a 9% coupon rate. What is their current yield?

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