# Ch. 6 HW- Business Finance - Ch 6 HW 1 Zane Perelli...

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Ch. 6 HW 1. Zane Perelli currently has \$92 that he can spend today on polo shirts costing \$ 23 each. Alternatively, he could invest the \$92 in a risk-free U.S. Treasury security that is expected to earn a 8% nominal rate of interest. The consensus forecast of leading economists is a 4% rate of inflation over the coming year. a) How many polo shirts can Zane purchase today?
b) How much money will Zane have at the end of 1 year if he forgoes purchasing the polo shirts today? (Ignore taxes.)
c) The expected price of the polo shirts at the end of 1 year in light of the expected inflation is
d) Using your findings in parts b and c, the number of polo shirts Zane can purchase at the end of 1 year is _____ shirts
In percentage terms, the more or fewer polo shirts Zane can buy at the end of 1 year is
e) Zane's real rate of return over the year is How is the real rate of return related to the percentage change in Zane's
buying power found in part d ?
2. A firm wishing to evaluate interest rate behavior has gathered yield data on five U.S. Treasury securities, each having a different maturity and all measured at the same point in time. The summarized data follow U.S. Treasury Security Time to Maturity Yield A 1 year 14.5% B 10 years 13.2% C 6 months 14.9% D 20 years 12.6% E 5 years 13.7% a) Select the graph that correctly shows the yield curve associated with the data shown in the table.
b) Describe the resulting yield curve in part a , and explain the general expectations embodied in it.