Question

#13

What is the expected one-year interest rate on a 1-year 1-Bill in four years? 12. YOP, Inc has a 3-year outstanding bond with 13% yield. Investors expect to earn an average of 3% in real rate of return. Inflation is expected to be 1.5%, 2.0% and 4% for the next 3 years. Its lack of popularity in the financial market requires it to pay 2.5% for its lack of liquidity, and its relatively short amount of time before maturity only requires a 1.5% maturity risk premium. What is YOP's default risk premium? 13. A financial analyst wants to estimate the real risk-free interest rate over the next 9 years. The Federal Reserve Bank estimates 9-year inflation rates to average 2.6% and the local commercial bank currently charges 10% for a 9-year loan. What is the expected real risk-free interest rate over the next 9 years? Table 2.4 lists various nominal exchange rates for the U.S. Compare the Euro/Dollar exchange rates in March 31, 2016 to November 30/2015. If you planned to vacation in France on one of these days with a constrained budget, holding all else constant, which day would you choose to travel? Why? Inice level (P) in the U.S. was 100 in comparison to 85 (P)in Canada on June 30, 2015 nge rate? If inflation takes place in Canada, causing its gen CAN/US exchange rates! If a

Answer 1

Exact real risk free rate=(1+nominal rate)/(1+inflation)-1=(1+10%)/(1+2.6%)-1=7.212%

Approximate real risk free rate=nominal rate-inflation rate=10%-2.6%=7.4%