homework Chapter 6

# homework Chapter 6 - Treasury bills are currently paying 8...

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Treasury bills are currently paying 8 percent and the inflation rate is 5.5 percent, the approximate real rate of interest is 2.5 (50%) percent. The exact real rate is 2.37 (50%) percent. (Input answers as percents rounded to 2 decimal places, without the percent sign.) The approximate relationship between nominal interest rates ( R ), real interest rates ( r ), and inflation ( h ), is: R = r + h Approximate r = 0.08 – 0.055 Approximate r =0.025 or 2.5% The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation, is: (1 + R ) = (1 + r )(1 + h ) (1 + 0.08) = (1 + r )(1 + 0.055) Exact r = [(1 + 0.08) / (1 + 0.055)] – 1 Exact r = 0.0237 or 2.37% BDJ Co. wants to issue new 11-year bonds for some much-needed expansion projects. The company currently has 6.4 percent coupon bonds on the market that sell for \$808.81, make semiannual payments, and mature in 11 years. If the company wants to sell the new bonds at par value, it should set a coupon rate of

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homework Chapter 6 - Treasury bills are currently paying 8...

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