4) The interest rate on conventional 1-year Treasury bonds is 7% and the interest rate on 1-year TIPS (Treasury inflation- protected securities) is 2.5%. You have 100,000 to invest in one of them. a) If you expect the average monthly inflation rate to be 0.5%, which bond offers the higher expected rate of return? b) At what inflation rate per month you will be indifferent?

4) The interest rate on conventional 1-year Treasury bonds is 7% and the interest rate on 1-year TIPS (Treasury inflation- protected securities) is 2.5%. You have 100,000 to invest in one of them. a) If you expect the average monthly inflation rate to be 0.5%, which bond offers the higher expected rate of return? b) At what inflation rate per month you will be indifferent?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 5MC: What would be the value of the bond described in Part d if, just after it had been issued, the...

See similar textbooks

Similar questions

Suppose the current interest rate on a one-year bond is 2% and the current interest rate on a two-year bond is 4%. The term premium on a two-year bond is 1%. According to the expectations hypothesis, what interest rate should we expect on a one-year bond next year? Answer as a percentage to one decimal place and do not include symbols (e.g. $, %, commas) in your answer. Answer:
Suppose you can observe that 1-year bond interest rate is 4%, 2-year bond interest rate is 8%, and 3-year bond interest rate is 10% at time t. It is also known that the term premium on a 2-year bond is 1% and the term premium on a 3-year bond is 1.5%. a) What are the market's expected 1-year bond interest rates for the next two years from time t? b) How to interpret those expected short-term interest rates? (what would be the "possible" economic meanings in the expected short- term interest rates?) Discuss as least two "candidates" to explain them.
Suppose the interest rate on a 1-year government bond is 3.00%, on a 4-year government bond is 3.50% and that on a 6-year government bond is 4.90%. What is the market's forecast for 2-year rates 4 years from now, assuming the pure expectations theory is correct? Show your work.
Suppose that you buy a two-year 7.3% bond at its face value. a-1. What will be your total nominal return over the two years if inflation is 2.3% in the first year and 4.3% in the second? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Nominal return a-2. What will be your real return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Real return % % Real return Nominal return b. Now suppose that the bond is a TIPS. What will be your total 2-year real and nominal returns? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) 1%
Suppose that the current one-year rate (one-year spot rate) and expected one-year government bonds over years 2, 3 and 4 are as follows: 1R1 = 4.80%, E(2r1) = 5.45%, E(3r1) = 5.95%, E(4r1) = 6.10% Assume that there are no liquidity premiums. To the nearest basis point, what is the current rate for the four-year-maturity government bond? 5.57% 5.62% 5.83% 6.10%
Suppose the yield on a two-year-old Treasury bond is 5 percent and the yield on a one-year Treasury bond is a 4 percent. If the maturity risk premium (MRP) on these bonds is zero (0), what is the expected one-year interest rate during the second year (Year 2)?
Assume that the real risk-free rate is 2% and that the maturityrisk premium is zero. If a 1-year Treasury bond yield is 5% and a 2-year Treasury bondyields 7%, what is the 1-year interest rate that is expected for Year 2? Calculate this yieldusing a geometric average. What inflation rate is expected during Year 2? Comment onwhy the average interest rate during the 2-year period differs from the 1-year interestrate expected for Year 2.
(b)You purchase the $110 bond today and sell it off next year at $108. What is its one-year rate of return (assume the bond’s coupon rate is 5% and its face value is $100)? If the expected inflation over the course of the year is 2%, what would the ex-ante real rate of return be for the bond on part (b)?
A $1,000 Treasury inflation-protected security is currently selling for $965 and carries a coupon interest rate of 3.35 percent. K a. If you buy this bond, how much will you receive for your first interest payment, assuming no interest adjustment to principal during this time period? b. If there's a 0.86 percent increase in inflation, what will be the new par value of the bond? c. What is your new semiannual interest payment? d. What would the par value be at maturity, assuming a 3.00 percent annual inflation rate and ten-year maturity period? Click on the table icon to view the FVIF table i ... a. If you buy this bond, assuming no interest adjustment to principal during this time period, your first interest payment would be $ 16.75 (Round to the nearest cent.) b. If there's a 0.86 percent increase in inflation, the new par value would be $1008.60. (Round to the nearest cent.) c. The new semiannual interest payment is $ (Round to the nearest cent.) pr
The yield on two-year government bonds is 4.5%, and one-year government bonds provide a yield of 3%. In addition, the real risk-free interest rate (r*) is 1%, and the maturity risk premium is 0. 1) According to the theory of expectation, what is the rate of return on annual government bonds from now to later? Calculate the rate of return using the geometric mean. 2) What are the expected inflation rates for the first and second years respectively?
Suppose that you buy a two-year 8.9% bond at its face value. a-1. What will be your total nominal return over the two years if inflation is 3.9% in the first year and 5.9% in the second? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) a-2. What will be your total real return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. Now suppose that the bond is a TIPS. What will be your total 2-year real and nominal returns? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)
You will receive $100 from a savings bond in 2 years. The nominal interest rate is 8.40%. a. What is the present value of the proceeds from the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. If the inflation rate over the next few years is expected to be 3.40%, what will the real value of the $100 payoff be in terms of today’s dollars? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. What is the real interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) d. Calculate the real payoff from the bond [from part (b)] discounted at the real interest rate [from part (c)]. (Do not round intermediate calculations. Round your answer to 2 decimal places.)