{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

ARE143_CHAP_9_2012_KEY-2

# ARE143_CHAP_9_2012_KEY-2 - 1 Managerial Economics(ARE 143...

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

1 Managerial Economics (ARE) 143 University of California, Davis Instructor: John H. Constantine KEY —Chapter 9—Interest Rates Problem 1 : A stock had a return of 12.2 percent last year. If the inflation rate was 4.3 percent, then what was the approximate real return? This is a Fisher equation problem: 12.2% – 4.3% = 7.9% Problem 2 : Your investments increased in value by 11.4 percent last year but your purchasing power increased by only 5.8 percent. What was the inflation rate? This is a Fisher equation problem: 11.4% – 5.8% = 5.6% Problem 3 : A T-bill with 35 days to maturity is quoted at 99.43. What are (i) the bank discount yield, (ii) the bond equivalent yield, and (iii) the effective annual return (APY or EAR)? (i) 99.43 = 100 × [1 – (35/360) × DY); discount yield = .05863 (ii) bond equivalent yield = [365(.05863)]/[360 – (35)(.05863)] = .05978 (iii) EAR = [1 + .05978/(365/35)]365/35 – 1 = .06143 Problem 4 : If 10-year T-bonds have a yield of 5.2%, 10-year corporate bonds yield 7.5%, the maturity risk premium on all 10-year bonds is 1.1%, and corporate bonds have a 0.2% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

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 ]}

### What students are saying

• 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.

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

• 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.

Dana University of Pennsylvania ‘17, Course Hero Intern

• 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.

Jill Tulane University ‘16, Course Hero Intern