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

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

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.

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.

{[ snackBarMessage ]}

### Page1 / 2

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

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online