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Ch02_Solutions_6e

# Ch02_Solutions_6e - INFLATION AND INTEREST RATES Real rate...

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CHAPTER 2 PROBLEMS THE FINANCIAL MARKETS AND INTEREST RATES PROBLEM 2-1 REAL INTEREST RATES Year 3-month T-Bill 30-year T-bond Inflation rate 2000 5.82% 5.94% 3.40% 2001 3.40% 5.43% 1.60% 2002 1.61% 5.41% 2.40% 2003 1.01% 4.93% 1.90% 2004 1.37% 4.86% 3.30% 2005 3.15% 4.51% 3.40% Security Treasury bill 2.73% 2.67% 0.06% Treasury bonds 5.18% 2.67% 2.51% PROBLEM 2-2 REAL INTEREST RATES Year 3-month T-Bill 30-year T-bond Inflation rate 1991 5.42% 8.14% 3.10% 1992 3.45% 7.67% 2.90% 1993 3.02% 6.59% 2.70% 1994 4.29% 7.37% 2.70% 1995 5.51% 6.88% 2.50% Security Treasury bill 4.34% 2.78% 1.56% Treasury bonds 7.33% 2.78% 4.55% PROBLEM 2-3 INFLATION AND INTEREST RATES Real rate 4.00% Exp inflation rate 7.00% Nominal rate = 11.28% Mean Nominal Yield % Mean Inflation Rate % Inferred Real Rate % Mean Nominal Yield % Mean Inflation Rate % Inferred Real Rate %

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PROBLEM 2-4 INFLATION AND INTEREST RATES Real rate 6.00% exp inflation rate 4.00% Nominal rate = 10.24% PROBLEM 2-5
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Unformatted text preview: INFLATION AND INTEREST RATES Real rate 7.00% exp inflation rate 5.00% Nominal rate = 12.35% PROBLEM 2-6 TERM STRUCTURE OF INTEREST RATES (a) Original Investment 20,000.00 Interest rate 8.00% Investment after 2 years 23,328.00 Original investment 20,000.00 Interest rate 6.00% Investment after 1 year 21,200.00 Difference 2,128.00 The second year would need to make up for the difference by paying: 10.04% (b) The 11.00% is greater than the 10.04% above so a liquidity premium is said to be required. MINI CASE Aaa Year 3 mo. T-bill 30 yr. T-bond Corp. bonds Inflation 2000 5.82% 5.94% 7.62% 3.40% 2001 3.40% 5.43% 7.08% 1.60% 2002 1.61% 5.41% 6.49% 2.40% 2003 1.01% 4.93% 5.66% 1.90% Mean 2.96% 5.43% 6.71% 2.33% k*= 0.64% IRP= 2.33% DRP= 1.29% MP= 2.47% LP= 0.04% given k= 6.75%...
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