The Acme Bank and Storm Dood Company (good old "AB&SDC") is trying to determine what rate of interest they should pay on the new 6 month CDs they are trying to get customers to buy. Looking at the WSJ here's some interest rates they found:
Prime: 5%; LIBOR: 3.25%; Fed Funds: 1.5%; 10 Month T-Note: 2.42%; 3 Month T-Bill 1.25%.
Believe it or not, AB&SDC has a rather shaky reputation - so much so knowledgeable investors would require an additional 8% to buy Acme's CDs to make up for their high risk of defalut (ignor maturity and liquidity issues).
Given the above, what nominal rate of interest must Acme's CDs hav to pay? (PLEASE SHOW WORK)
Since maturity and liquidity risks are to be ignored, we are left only with the default risk. The 8% additional premium will cover the default risk so we need to get the risk-free rate. The only risk-free rate given here is the 3-month T-bill rate of 1.25% so the nominal rate of interest for Acme has to be 1.25% + 8% = 9.25%.
The Acme Bank and Storm Dood Company (good old "AB&SDC") is trying to determine what rate of interest they s...
The Acme Bank and Storm Dood Company (good old "AB&SDC") is trying to determine what rate of interest they should pay on the new 6 month CDs they are trying to get customers to buy. Looking at the WSJ here's some interest rates they found: Prime: 5%; LIBOR: 3.25%; Fed Funds: 1.5%; 10 Month T-Note: 2.42%; 3 Month T-Bill 1.45%. Believe it or not, AB&SDC has a rather shaky reputation - so much so knowledgeable investors would require an additional...