The required return of a risk-free asset can be approximated by The pure time value of money and anticipated inflation premium. а. The 20-year T-bond yield. Ob. The 90-day T-bill rate plus the risk premium. C. The 90-day T-bill rate plus anticipated inflation premium.

The required return of a risk-free asset can be approximated by The pure time value of money and anticipated inflation premium. а. The 20-year T-bond yield. Ob. The 90-day T-bill rate plus the risk premium. C. The 90-day T-bill rate plus anticipated inflation premium.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

The required return of a risk-free asset can be approximated by
The pure time value of money and anticipated inflation premium.
а.
The 20-year T-bond yield.
Ob.
The 90-day T-bill rate plus the risk premium.
C.
The 90-day T-bill rate plus anticipated inflation premium.
d.

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Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty. This is the rate for a short-term riskless security when inflation is expected to be zero. It is calculated by adding the inflation premium to r*. This is the premium added as a compensation for the risk that an investor will not get paid in full. It is based on the bond's marketability and trading frequency; the less frequently the security is traded, the higher the premium added, thus increasing the interest rate. Component Liquidity risk premium Maturity risk premium Inflation premium…

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