Please describe the Debtors’ Risk Premium component of the Nominal Rate of Interest. That is, explain...
Please describe the Debtors’ Risk Premium component of the Nominal Rate of Interest. That is, explain why it arises and how it works. Describe any discrimination which arises, as well
Homework Answers
Answer :-
The real rate of interest is the nominal rate minus the expected inflation rate.For these bonds, a risk premium is added to the risk-free rate to arrive at the real interest rate. Other factors, such as the maturity and liquidity of the bond, may also affect the real interest rate.
The Five Components of interest rates are -
Real Risk-Free Rate
Expected Inflation
Default-Risk Premium
Liquidity Premium
Maturity Premium
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Please describe the Debtors’ Risk Premium component of the
Nominal Rate of Interest. That is, explain...
Suppose the nominal policy interest rate in New Zealand is 1.5% (recall that this rate is...
Suppose the nominal policy interest rate in New Zealand is 1.5% (recall that this rate is called Official Cash Rate or OCR), it is risk-free. The expected inflation rate is 1.7%. Further suppose that the nominal interest rate at which New Zealand businesses can borrow is 4.7%, please call this rate the nominal borrowing rate. a. Calculate the exact real policy interest rate and the approximate real policy interest rate. b. Calculate the exact and approximate real borrowing rates? c....
Assume that the real interest rate is 2%, the default risk premium is 3%, the liquidity...
Assume that the real interest rate is 2%, the default risk premium is 3%, the liquidity premium is 1%, and the maturity risk premium is 1% per year. Additional, the expected inflation rate is 3% next year, 1% the year after, and 10% from then on. What are the nominal interest rates for: a) 1-year note? b) 5-year note? c) does this produce an inverted yield curve? Why or why not? Please show all work!
Graphically and verbally describe how the inflationary price premium is attached to the nominal rate of...
Graphically and verbally describe how the inflationary price premium is attached to the nominal rate of interest. Your answer must comprise a complete and thoroughgoing explanation of this phenomenon. Specify and explain the three most important independent variables affecting the demand for money.
Assume that the average real interest rate is 2%, the default risk premium is 3%, the...
Assume that the average real interest rate is 2%, the default risk premium is 3%, the liquidity premium is 1%, and the maturity risk premium is 2%. Additionally, expected inflation is 2% next year, 5% the year after, and 396 from then on. What is the nominal interest rate for a 10-year bond?
Define interest rate risk. Explain the two types of interest rate risk. Explain duration and bond...
Define interest rate risk. Explain the two types of interest rate risk. Explain duration and bond properties and describe how an investor with a given holding period can use duration to reduce interest rate risk.
Which of these is TRUE of the nominal risk-free rate and the real risk-free rate? Real...
Which of these is TRUE of the nominal risk-free rate and the real risk-free rate? Real risk-free rate must always include inflation premium Nominal risk-free rate includes inflation while real risk-free rate does not Real risk-free rate excludes the product of inflation and inflation premium None of the above
The following premiums apply to a 6 month bond: interest rate risk premium = 0.22 percent;...
The following premiums apply to a 6 month bond: interest rate risk premium = 0.22 percent; real rate = 3.50 percent; default premium = 0.12 percent; inflation premium = 1.45 percent. What is the expected difference in nominal interest rates between a 6-month risky security and a 6 month, default free security? PLZ show work and explanation
13) The nominal required return on XYZ stock is 14%. The nominal risk-free rate of return is 4% and the real risk-f...
13) The nominal required return on XYZ stock is 14%. The nominal risk-free rate of return is 4% and the real risk-free rate of return is 2%. How much are investors requiring as compensation for risk? What is the inflation premium?
Suppose that the inflation premium is 2 percent and the nominal interest rate is 9 percent....
Suppose that the inflation premium is 2 percent and the nominal interest rate is 9 percent. Instructions: Round your answers to the nearest whole number. a. What is the real interest rate? percent b. Given the level of inflation, how many years would it take for the price level to double? years
Suppose that the inflation premium is 2 percent and the nominal interest rate is 9 percent....
Suppose that the inflation premium is 2 percent and the nominal interest rate is 9 percent. Instructions: Round your answers to the nearest whole number. a. What is the real interest rate? percent b. Given the level of inflation, how many years would it take for the price level to double? years
Assume that the average real interest rate is 2%, the default risk premium is 3%, the liquidity premium is 1%, and the maturity risk premium is 2%. Additionally, expected inflation is 2% next year, 5% the year after, and 396 from then on. What is the nominal interest rate for a 10-year bond?
13) The nominal required return on XYZ stock is 14%. The nominal risk-free rate of return is 4% and the real risk-free rate of return is 2%. How much are investors requiring as compensation for risk? What is the inflation premium?
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