ImranOmer_37_15663_1_Questions Market Interest Rate.docx - From the Desk of Imran Omer The Determinants of Market Interest Rate Q1 Assume that it is now

# ImranOmer_37_15663_1_Questions Market Interest Rate.docx -...

• Test Prep
• 2

This preview shows page 1 - 2 out of 2 pages.

From the Desk of: I mran O mer The Determinants of Market Interest Rate Q1: Assume that it is now January 1, 2002. The rate of inflation is expected to be 4% throughout 2002. However, increased government deficits and renewed vigor in the economy are then expected to push inflation rates higher. Investors expect the inflation rate to be 5% in 2003, 6% in 2004, and 7% in 2005. The real risk-free rate, k*, is expected to remain at 2% over the next 5 years. Assume that no maturity risk premiums are required on bonds with 5 years or less to maturity. The current interest rate on 5-year T-bonds is 8%. a. What is the average expected inflation rate over the next 4 years? b. What should be the prevailing interest rate over the next 4 year T-bonds? c. What is the implied expected inflation rate in 2006, or Year 5, given that Treasury bonds which mature in that year yield 8%? Q2: The real risk free rate of interest is 3%. Inflation expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero.

• Fall '18

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern