Maria is a professional tennis player, and your firm manages her money. She has asked you to give her information about what determines the level of various interest rates. Your boss has prepared some questions for you to consider. 1. Can you suggest the fundamental factors that typically affect the cost of money, or the level of interest rates in the economy? What are other factors we should also take into consideration? 2. Consider the terms inflation premium (IP), default risk premium (DRP), liquidity premium (LP), and maturity risk premium (MRP). Please describe how these premiums determine the interest rate on (1) short-term U.S. Treasury securities, (2) long-term U.S. Treasury securities, (3) short-term corporate securities, and (4) long-term corporate securities. Also, explain how the premiums would vary over time and among the different securities listed.
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Maria is a professional tennis player, and your firm manages her money. She has asked you...
c. Define the terms inflation premium (IP), default risk premium (DRP), liquidity premium (LP), and maturity risk premium (MRP). Which of these premiums is included in determining the interest rate on (1) short-term U.S. Treasury securities, (2) long-term U.S. Treasury securities, (3) short-term corporate securities, and (4) long-term corporate securities? Explain how the premiums would vary over time and among the different securities listed.
18. Problem 6.17 INTEREST RATE PREMIUMS A 5-year Treasury bond has a 3.35% yield. A 10-year Treasury bond yields 6.25%, and a 10-year corporate bond yields 9.55%. The market expects that inflation will average 3.15% over the next 10 years (IP10 = 3.15%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium...
Excel Online Structured Activity: Interest rate premiums A5-year Treasury bond has a 4.8 % yield . A 10- year Treasury bond yields 6.9 % , and a 10-year corporate bond yields 9.65 %. The market expects that inflation will average 3.45% over the next 10 years (IP10 3.45 % ) . Assume that there is no maturity nsk premium (MRP 0) and that the annual real risk-free rate, r, will remain constant over the next 10 years. (Hint: Remember that...
3. Calculating interest rates The real risk-free rate (r) is 2.80% and is expected to remain constant into the future. Inflation is expected to be 3.20% per year for each of the next four years and 2.00% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.10 x(t-1)%, where is the security's maturity. The liquidity premium (LP) on all Tahoe Hydroponics's bonds is 0.60%. The following table shows the current relationship between bond ratings and default risk premiums...
Calculating interest rates The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 6% per year for each of the next three years and 5% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t – 1)%, where t is the security’s maturity. The liquidity premium (LP) on all Rinsemator Group’s bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating...
3. Calculating interest rates The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 3% per year for each of the next two years and 2% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t - 1)%, where t is the security's maturity. The liquidity premium (LP) on all Tahoe Hydroponics's bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP):...
1. A firm is considering a project that has the following estimated cash flows and weighted average cost of capital (WACC). What is the project's net present value? WACC: 10.00% Year Cash flow 0 -$1,050 1 $500 2 $400 3 $300 A. -$47.38 B. $39.48 C. -$29.61 D. $43.27 E. -$39.48 2. Which of the following statements is CORRECT? A. A downward sloping yield curve for U.S. Treasury securities is called a normal yield curve. B. The maturity risk premiums...
Calculating interest rates problem: 3. Calculating interest rates The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 6% per year for each of the next four years and 5% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t - 10%, where t is the security's maturity. The liquidity premium (LP) on all Harrington Horticulture Co.'s bonds is 1.05%. The following table shows the current relationship between bond ratings...
4. Calculating interest rates Aa Aa E The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 4% per year for each of the next three years and 3% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t - 1)%, where t is the security's maturity. The liquidity premium (LP) on all Pellegrini Southern Inc.'s bonds is 1.05%. The following table shows the current relationship between bond ratings and...
Assignment 06 - Interest Rates 4. Calculating interest rates Aa Aa The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 6% per year for each of the next two years and 5% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t - 1)%, where t is the security's maturity. The liquidity premium (LP) on all Global Satellite Corp.'s bonds is 0.55%. The following table shows the current relationship...