ch7sol - CHAPTER 7 RISKLESS RATES AND RISK PREMIUMS Problem...

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CHAPTER 7 RISKLESS RATES AND RISK PREMIUMS Problem 1 I would use the U.S. treasury bond rate. There is country risk but it is best shown as part of the risk premium. Problem 2 Because it exposes you to reinvestment risk – the rate will be different in 6 months. A more appropriate rate would be a 5-year treasury (preferable a zero coupon). Problem 3 Rupiah riskless rate = Government bond rate – Default spread = 17% - 5% = 12% Problem 4 70 = 45 (1+ r India ) 10 /(1.05) 10 Solving for r, you get = 9.74% Problem 5 You could use the 3% rate on inflation-index treasury bonds as your riskless rate, if you assume that capital flows freely across countries. If this is the case, the real riskless rate has to be the same across countries. However, the assumption about free capital flows may not be appropriate in some countries. An alternative approach would be to set the real riskless rate = expected real growth rate in the long term in Chile.
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ch7sol - CHAPTER 7 RISKLESS RATES AND RISK PREMIUMS Problem...

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