{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

ch. 5 problems

# ch. 5 problems - next year k = k pr INFL DR LR k=3 9 2 1%=...

This preview shows pages 1–2. Sign up to view the full content.

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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

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%...
View Full Document

{[ snackBarMessage ]}