Question

Suppose the returns on long-term corporate bonds and T-bills are normally distributed. Assume for a certain time period, long-term corporate bonds had an average return of 6.4% and a standard deviation of 8.3%. For the same period, T-bills had an average return of 3.4% and a standard deviation of 3.1%. Use the NORMDIST function in Excel® to answer the following questions:

a.	What is the probability that in any given year, the return on long-term corporate bonds will be greater than 10 percent? Less than 0 percent? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	What is the probability that in any given year, the return on T-bills will be greater than 10 percent? Less than 0 percent? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
c.	In 1979, the return on long-term corporate bonds was −4.18 percent. How likely is it that such a low return will recur at some point in the future? T-bills had a return of 10.56 percent in this same year. How likely is it that such a high return on T-bills will recur at some point in the future? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

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STATS - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut Calibri Dr General -11AA = = = D- DA E Copy Paste Format Painter Clipboard Wrap Text Merge & Center - BI U $ :.: Insert Delete Format % , Number Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Z Sort & 2 Clear Filter Editing Find & Select Font Alignment Cells V568 N. 0 P Q R S T U V W X Y Z 568 LONG TERM CORPORATE BONDS AVERAGE RETURN = 6.4 SD = 8.3 T BILLS AVERAGE RETURN = SD = 3.4 3.1 X= 10 569 570 571 572 573 a 574 575 576 577 578 579 b PROBABILITY THAT RETURN ON LONG TERM CORPORATE BONDS WILL BE GREATER THAN 10% 33.22% [=1- NORM.DIST(P573,P570,P571,1)] X= PROBABILITY THAT RETURN ON LONG TERM CORPORATE BONDS WILL BE LESS THAN 0% 22.03% (=NORM.DIST(P576,P570,P571,1)] X= 10 PROBABILITY THAT RETURN ON T BILLS WILL BE GREATER THAN 10% 580 1.66% [=1 - NORM.DIST(P579,T570,1571,1)] 581 X PROBABILITY THAT RETURN ONT BILLS WILL BE LESS THAN 0% 13.64% [= NORM.DIST(P582,T570,7571,1)] 582 583 584 585 586 587 DEAR Sheet2 COV TIME SERIES corr REGRESSION range CAMERA TREND fregMATRIX INTERVAL, NORMAL HYPOTHESIS SOC/GP a ssignment ferences MATHS 00 LPP prob i I 120% Red 0 + 2. B 19 * OENG 29-11-2019

X 2 E. Insert = Page Layout STATS - Microsoft Excel (Product Activation Failed) Add-Ins File Home Formulas Data Review View - 2x % Cut Calibri Dr General -11AA = = = D- DA Wrap Text Merge & Center - m Find & BI U $ % , :.: Insert Delete Format E Copy Paste Format Painter Clipboard N593 Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill 2 Sort & 2 Clear Filter Editing Select Font Alignment Number Cells N O P Q R T U V W X Y Z 584 585 C-1 586 X= -4.18 PROBABILITY THAT SUCH LOW RETURN OCCUR 10.12% (=NORM.DIST(P585,P570,P571,1)] 587 X= 10.56 PROBABILITY THAT SUCH HIGH RETURN OCCUR x=OBABILI 1.05% (=1 - NORM.DIST(P588,7570,T571,1)] 588 C-2 589 590 591 592 593 594 595 596 597 598 599 600 601 602 603 604 DEAR Sheet2 COV TIME SERIES corr REGRESSION range CAMERA TREND fregMATRIX INTERVAL, NORMAL HYPOTHESIS SOC/GP a ssignment ferences MATHS LPP prob i I BOI 120% Rea 2. 9 * * O ENG 29-11-2019