Ch 5 problems - next year k = k pr INFL DR LR k=3 9 2 1%= 15 12 INFL-5 yr-one and 7 each yr after MR 0 for yr-one but will increase for longer debt

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Serenity Witten AGEC 424 Ch. 5 Problems 4. Nu-Mode Fashions Inc. Estimate interest rate expected to pay on one-year loan. 3% default risk premium, liquidity and maturity risk premiums are each ½%, inflation expected to be 4% over the next 12 months. Pure interest believed to be currently about 3½ %. k = k pr + INFL + DR + LR + MR k=3 ½% + 4% + 3% + ½% + ½%= 11 ½% 5. Continuation of problem #4. Rate on a two-year loan. k = k pr + INFL + DR + LR + MR k=3 ½% + 5% + 4% + ¾% + ¾%=14% 7. Adam’s Inc. borrowed money for one year at 9%, pure rate is 3%, default risk of 2% and liquidity risk premium of 1%. The is little or no maturity risk. Inflation rate lenders expect
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Unformatted text preview: next year? k = k pr + INFL + DR + LR k=3% + 9% + 2% + 1%= 15% 12. INFL-5% yr-one, and 7% each yr after. MR- 0% for yr-one but will increase for longer debt. Gov. debt-9% yr-one, 11% yr-two a. What is the real risk-free rate and the maturity risk premium for two-year debt? k1=k PR + I1 + MR 9% = k PR +5% +0% k PR = 4% k2= k PR + (I 1 +I 2 )/2 + MR 2 11%= 4% + 6% + MR 2 MR 2 = 1% b. Forecast the normal yield on one- and two-year government debt issued at the beginning of the second year. K 1 = k PR + I 1 =4% +7% =11% K 2 = k PR + (I 1 +I 2 )/2 + MR 2 =4% + 7% + 1%= 12%...
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This note was uploaded on 11/08/2010 for the course AGEC 424 taught by Professor Staff during the Spring '08 term at Purdue University-West Lafayette.

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Ch 5 problems - next year k = k pr INFL DR LR k=3 9 2 1%= 15 12 INFL-5 yr-one and 7 each yr after MR 0 for yr-one but will increase for longer debt

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