{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Mini_Case-_Chapter_2_7th_Edition_

Mini_Case-_Chapter_2_7th_Edition_ - k = 6.7425 Adding what...

Info icon This preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 2- Mini Case Given: From Table 2-2 (p. 33) 3- mo. 30 yr. Aaa Corp. Inflation T-Bill T-Bond Bond Rate 2000 5.82 5.94 7.62 3.40 2001 3.40 5.43 7.08 1.60 2002 1.61 5.41 6.49 2.40 2003 1.01 4.93 5.66 1.90 Average 2.96 5.43 6.71 2.33 3 mo. T-Bill rate = 2.96% 30 yr. T-Bond rate = 5.43% 30 yr. AAA bond rate = 6.71% Inflation rate = 2.33% Benchmarks are 4 year averages of 2000 - 2003 (But are given in Shows how in real world would extimate. Here analys that the period 2000-2003 is indication of conditions n Real interest rate (k*) = 3-mo. T-Bill - Inflation Rate 2.96 - 2.33 0.63 0.6300 3-mo. T-Bill has no DRP, MP or LP. Inflation risk premium (IRP) = 2.33 2.33 2.3250 expected inflation Default risk premium ( DRP) = Aaa Corp. Bond - 30 yr. T-Bond 6.71 - 5.43 1.28 1.2850 DRP is only difference between these two debts. Maturity risk premium (MRP) = 30 yr. T-Bond - 3-mo. T-Bill 5.43 - 2.96 2.47 2.4675 MRP is only difference between these two debts. Liquidity risk premium (LP) =.04 (given) 0.04 0.0400
Image of page 1

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

View Full Document Right Arrow Icon
k = k* + IRP + DRP + MRP + LP k = 0.63 + 2.33 + 1.28 + 2.47 + 0.04 = 6.75
Image of page 2
Image of page 3

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

View Full Document Right Arrow Icon
Image of page 4
Image of page 5

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

View Full Document Right Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: k = 6.7425% Adding what is actually in the computer Mini Case does not say figures are averages of a 4 year period and mer averages to 1/100 of a percent. This makes the correct answer 6.75%. I graded based on 6.75% being the correct answer. in the case.) st believes now. rely gives the Rounding Errors Your calculator's display can be changed to show as many decimal points If you set it at 2 decimal points it will display 2 but calculates using more ( In this mini-case Accurate No. Rounded No. k* = 0.63000000 0.63 IRP = 2.32500000 2.33 DRP = 1.28500000 1.29 MRP = 2.46750000 2.47 LP = 0.04000000 0.04 Sum 6.74750000 6.77 6.725 rounded to 2 decimal points is 6.75%. If you add up rounded numbers you get 6.77%. Difference is .02% (.0002) Walmart's sales are approximately $9,000,000,000 .02 percent of this is $1,800,000 On exams and homework I will want accuracy to 1/100 of a percent. s as you wish. (Excel same)...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern