Problem 1 – A particular security’s equilibrium rate of return is 8 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 3.5 percent. The security’s liquidity risk premium is .25 percent and maturity risk premium is .85 percent. The security has no special covenants. Calculate the security’s default risk premium. (LG 2-6)
Problem 2 – You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that one-year T-bills are currently earning 3.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: (LG 2-6)
Problem 18 – Calculate the present value of $5,000 received five years from today if your investments pay (LG 2-9)
- 6 percent compounded annually
- 8 percent compounded annually
- 10 percent compounded annually
- 10 percent compounded semiannually
- 10-percent compounded quarterly
What do your answers to these questions tell you about the relation between present values and interest rates and between present values and the number of compounding periods per year?
Problem 19 – Calculate the future value in five years of $5,000 received today if your investments pay (LG 2-9)
- 6 percent compounded annually
- 8 percent compounded annually
- 10 percent compounded annually
- 10-percent compounded semiannually
- 10-percent compounded quarterly
What do your answers to these questions tell you about the relation between future values and interest rates and between future values and the number of compounding periods per year?
Problem 26 – Compute the future values of the following first assuming that payments are made on the last day of the period and then assuming payments are made on the first day of the period: (LG 2-9).
SOLUTION
- A particular security’s equilibrium rate of return is 8 For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 3.5 percent. The security’s liquidity risk premium is .25 percent and maturity risk premium is .85 percent. The security has no special covenants. Calculate the security’s default risk premium.
Equilibrium ROR = 8%
Inflation Risk Premium = 1.75% RIR = 3.5%
Liquidity Risk Premium = 0.25% Maturity Risk Premium = .85%
I*= IP + RIR + DRP + LRP + SCP + MRP
8% = 1.75% + 3.5% + DRP + 0.25% + 0% + 0.85%……please click the icon below to purchase the entire solution at $10