Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 3, Problem 26PS
Summary Introduction
To discuss: The reason for person X to believing someone who says 5-year spot interest rate is 2.5% and whether he can make money if that person was right and the minimum sensible value for 5-year spot rate.
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The yield curve indicates that the two-year interest rate will be a function of what variables? Include in your answer an explanation of how changes in these variables will affect the two-year interest rate.
You are researching interest rates and their forecasts. Your research provides you with the following:
1-year rate = 6% 2-year rate = 6.125% 3-year rate = 8.5%
1-year rate, 2 years from now = 6.5%
Assuming you can borrow $1 million, can you use this interest rate information to earn some risk-free profit. if yes, compute the profit. Show detailed workings. Assume that the pure expectations theory applies.
Suppose the risk - free interest rate is 4.2%.a. Having $200 today is equivalent to having what amount in one year?b. Having $200 in one year is equivalent to having what amount today?c. Which would you prefer, $200 today or $200 in one year? Does your answer depend on when you need the money? Why or why not?a. Having $200 today is equivalent to having what amount in one year?Having $200 today is equivalent to having Sin one year. (Round to the nearest cent.)
Chapter 3 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 3 - (PRICE) In February 2009, Treasury 8.5s of 2020...Ch. 3 - (YLD) On the same day, Treasury 3.5s of 2018 were...Ch. 3 - (DURATION) What was the duration of the Treasury...Ch. 3 - (MDURATION) What was the modified duration of the...Ch. 3 - Prob. 1PSCh. 3 - Bond prices and yields The following statements...Ch. 3 - Prob. 3PSCh. 3 - Bond prices and yields A 10-year German government...Ch. 3 - Bond prices and yields Construct some simple...Ch. 3 - Spot interest rates and yields Which comes first...
Ch. 3 - Prob. 7PSCh. 3 - Spot interest rates and yields Assume annual...Ch. 3 - Prob. 9PSCh. 3 - Prob. 10PSCh. 3 - Duration True or false? Explain. a....Ch. 3 - Duration Calculate the durations and volatilities...Ch. 3 - Term-structure theories The one-year spot interest...Ch. 3 - Real interest rates The two-year interest rate is...Ch. 3 - Duration Here are the prices of three bonds with...Ch. 3 - Prob. 16PSCh. 3 - Prob. 17PSCh. 3 - Spot interest rates and yields A 6% six-year bond...Ch. 3 - Spot interest rates and yields Is the yield on...Ch. 3 - Prob. 20PSCh. 3 - Prob. 21PSCh. 3 - Duration Find the spreadsheet for Table 3.4 in...Ch. 3 - Prob. 23PSCh. 3 - Prob. 25PSCh. 3 - Prob. 26PSCh. 3 - Prob. 27PSCh. 3 - Prob. 28PSCh. 3 - Prob. 29PSCh. 3 - Prices and yields If a bonds yield to maturity...Ch. 3 - Prob. 31PSCh. 3 - Price and spot interest rates Find the arbitrage...Ch. 3 - Prob. 33PSCh. 3 - Prices and spot interest rates What spot interest...Ch. 3 - Prices and spot interest rates Look one more time...
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- Suppose the risk-free interest rate is 4.6%. Having $600 today is equivalent to having what amount in one year? (Round to the nearestcent.) Having $600 in one year is equivalent to having what amount today? (Round to the nearestcent.) Which would you prefer, $600 today or $600 in one year? Does your answer depend on when you need the money? Why or why not? (Round to the nearestcent.)arrow_forwardConstruct a spreadsheet to convert a nominal interest rate compounded m times per year i(m) and convert it to an effective rate jn per 1/n of a year. On the same spreadsheet, also start with an effective rate jm per 1/m of a year and convert it to a nominal rate i(n) compounded n times per year. Use your spreadsheet to solve the following two problems: Given the nominal rate i(12) = 5.700%, find the equivalent effective semi-annual rate. Given the effective semi-annual rate j2 = 2.884%, find the equivalent nominal rate ¡(12).arrow_forwardIf you are promised a nominal return of 16%, on a one-year investment, and you expect the rate of inflation to be 2%, what real rate do you expect to earn? Use the Fisher equation, NOT the approximation.arrow_forward
- How can you use zero-coupon yields to calculate implied one-year forward rates? Give an examplearrow_forward1. A consumer, who is initially a lender, remains a lender even after a decline in interest rates. Is this consumer better off or worse off after the change in interest rates? If the consumer becomes a borrower after the change is he better off or worse off? 2. What is the present value of $100 one year from now if the interest rate is 10%? What is the present value if the interest rate is 5%?arrow_forwardSuppose someone offers to pay you $1,000 in one year. Which of the following is/are correct? Select all that apply. O If inflation goes up, the present value of that $1,000 would go down. O If your time preference goes up (i.e., you become more impatient), the present value of that $1,000 for you would go down. If interest rates go up, the present value of that $1,000 would also go up. O If uncertainty in the economy goes up, the present value of that $1,000 would also go up.arrow_forward
- Now explain this meaning of G(s, t) when t is less than s. We go backwards in For tarrow_forwardOptimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on savings accounts is 0.65% at a time when inflation is around 1.45%. For the average saver, the real rate of interest on his or her savings is %. (Round your response to two decimal places and use a minus sign if necessary.) If banks expect that the rate of inflation in the coming year will be 4.45% and they want a real return of 5.5% on a certain category of loans, then the nominal rate they should charge borrowers on those loans is %. (Round your response to two decimal places. If the economy experiences an unexpectedly high rate of inflation, the group that would tend to benefit is O A. debtors (people or businesses who owe money) O B. creditors (people or institutions that are owed money) O C. both would benefit equally. O D. neither benefits.arrow_forwardSuppose the real rate on your investment is 9.5 percent and the inflation rate is 2.6 percent. What nominal rate would you expect to see on your investment? Use the Fisher Effect Formula.arrow_forwardPlease help me in calculating the Return on Investment and Break-Even Point, and please help me convert the result of Break-Even Point to years and days, thanks! Attached is a formula.arrow_forwardHow long will it take to double your investment if the interest rate is r=0.06 (r=6%)?arrow_forwardWhy is the optimal interest coverage ratio equal to 1 if taxes are the only imperfection?arrow_forwardarrow_back_iosSEE MORE QUESTIONSarrow_forward_ios
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