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Mini_Case-_Chapter_2_7th_Edition_

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

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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

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k = k* + IRP + DRP + MRP + LP k = 0.63 + 2.33 + 1.28 + 2.47 + 0.04 = 6.75

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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)...
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