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FIN3300 Solution Ch7 (M 0712)-1

# FIN3300 Solution Ch7 (M 0712)-1 - Solution Chapter 7...

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Solution Chapter 7: Interest Rates and Bond Valuation Page 227 Questions: 9, 10, 11, 22, 23, 26 9. The approximate relationship between nominal interest rates ( R ), real interest rates ( r ), and inflation ( h ) is: R = r + h Approximate r = .07 – .038 =.032 or 3.20% 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 + .07) = (1 + r )(1 + .038) Exact r = [(1 + .07) / (1 + .038)] – 1 = .0308 or 3.08% 10. The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation is: (1 + R ) = (1 + r )(1 + h ) R = (1 + .047)(1 + .03) – 1 = .0784 or 7.84% 11. The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation is: (1 + R ) = (1 + r )(1 + h ) h = [(1 + .14) / (1 + .09)] – 1 = .0459 or 4.59% 22. To find the number of years to maturity for the bond, we need to find the price of the bond. Since we already have the coupon rate, we can use the bond price equation, and solve for the number of years to maturity. We are given the current yield of the

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