1. The real risk-free rate, r*, is 3.15%. Inflation is expected to average 1.85% a year for the next 4 years, after which time inflation is expected to average 4.6% a year. Assume that there is no maturity risk premium. An 11-year corporate bond has a yield of 11.85%, which includes a liquidity premium of 0.4%. What is its default risk premium? Do not round intermediate calculations. Round your answer to two decimal places.
%
2. An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inflation. A 6-year security with no maturity, default, or liquidity risk has a yield of 19.55%. If the real risk-free rate is 6.5%, what average rate of inflation is expected in this country over the next 6 years? Do not round intermediate calculations. Round your answer to two decimal places.
1
r = real risk free rate + Inflation Premium + Liquidity premium +default risk premium
11.85 = 3.15 +(1.85*4+4.6*(11-4))/11+0.4+default risk premium
default risk premium=4.7%
2
| Real return = ((1+nominal return)/(1+inflation rate)-1)*100 |
| 0.065=((1+0.1955)/(1+inflation rate)-1)*100 |
| inflation rate% = 12.25 |
1. The real risk-free rate, r*, is 3.15%. Inflation is expected to average 1.85% a year...