Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 5, Problem 32P
Suppose the current one-year interest rate is 6%. One year from now, you believe the economy will start to slow and the one-year interest rate will fall to 5%. In two years, you expect the economy to be in the midst of a recession, causing the Federal Reserve to cut interest rates drastically and the one-year interest rate to fall to 2%. The one-year interest rate will then rise to 3% the following year, and continue to rise by 1 % per year until it returns to 6%, where it will remain from then on.
- a. If you were certain regard ng these future interest rate changes, what two-year interest rate would be consistent with these expectations?
- b. What current term structure of interest rates, for terms of 1 to 10 years, would be consistent with these expectations?
- c. Plot the yield curve in this case. How does the one-year interest rate compare to the 10-year interest rate?
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You borrow $1,000 from a bank at
6% annual interest and promise to
pay it back after a year. As you sign
the loan documents, both you and
the bank expect inflation to be 3% in
the coming year. During the course
of the year, however, the average
price level rises by only 1%. What
best describes this situation?
Select one:
a. Both you and the bank are
better off because the inflation
rate is less than the nominal
interest rate but greater than
zero.
O b. The bank has gained at your
expense because the real
interest rate on the loan is higher
than expected.
c. Neither you nor the bank has
gained anything extra because
the inflation rate is less than the
nominal interest rate.
O d. You have gained at the bank's
expense because you can pay
the bank back in inflated dollars.
Suppose you know that based on the current economic settings, you can purchase 11% more goods next year if you leave your money in the bank. If the expected inflation rate next year is 4%, what is the exact interest rate your bank is quoting you?
The two-year interest rate is 10.4%, and the expected annual inflation rate is 5.2%.
a. What is the expected real interest rate?
b-1. If the expected rate of inflation suddenly rises to 7.2%, what does Fisher's theory say about how the real interest rate will change?
b-2. If the expected rate of inflation suddenly rises to 7.2%, what will be the new nominal rate?
Complete this question by entering your answers in the tabs below.
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Req B1
Req B2
What is the expected real interest rate?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
Expected real interest rate
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Chapter 5 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 5.1 - Prob. 1CCCh. 5.1 - Prob. 2CCCh. 5.2 - How can you compute the outstanding balance on a...Ch. 5.2 - What is an amortizing loan?Ch. 5.3 - What is the difference between a nominal and real...Ch. 5.3 - How do investors expectations of future short-term...Ch. 5.4 - Prob. 1CCCh. 5.4 - How do taxes affect the interest earned on an...Ch. 5.5 - What is the opportunity cost of capital?Ch. 5.5 - Why do different interest rates exist, even in a...
Ch. 5 - Your bank is offering you an account that will pay...Ch. 5 - Which do you prefer: a bank account that pays 5%...Ch. 5 - Prob. 3PCh. 5 - Prob. 4PCh. 5 - You are considering moving your money to a new...Ch. 5 - Prob. 6PCh. 5 - Prob. 7PCh. 5 - You can earn 50 in interest on a 1000 deposit for...Ch. 5 - Prob. 9PCh. 5 - Prob. 10PCh. 5 - Prob. 11PCh. 5 - Prob. 12PCh. 5 - Prob. 13PCh. 5 - Prob. 14PCh. 5 - You have just sold your house for 1,000,000 in...Ch. 5 - Prob. 16PCh. 5 - Your mortgage has 25 years left, and has an APR of...Ch. 5 - Prob. 18PCh. 5 - Prob. 19PCh. 5 - Prob. 20PCh. 5 - Prob. 21PCh. 5 - Prob. 22PCh. 5 - The mortgage on your house is five years old. It...Ch. 5 - You have credit card debt of 25,000 that has an...Ch. 5 - Prob. 25PCh. 5 - Prob. 26PCh. 5 - Prob. 27PCh. 5 - Prob. 28PCh. 5 - Suppose the term structure of risk-free interest...Ch. 5 - Prob. 30PCh. 5 - Prob. 31PCh. 5 - Suppose the current one-year interest rate is 6%....Ch. 5 - Figure 5.4 shows that Johnson and Johnsons...Ch. 5 - Prob. 34PCh. 5 - Prob. 35PCh. 5 - Prob. 36PCh. 5 - Your best friend consults you for investment...Ch. 5 - Suppose you have outstanding debt with an 8%...Ch. 5 - In the summer of 2008, at Heathrow Airport in...Ch. 5 - Your firm is considering the purchase of a new...Ch. 5 - Prob. 41P
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