finc400 assignment 1
Answer all the questions.
1. At present, 10-year Treasury Bonds are yielding 3.9% while a 10 year corporate bond is yielding 6.1%. If the liquidity-risk premium on the corporate bond is 0.7%, what is the corporate bonds default-risk premium? Note that the treasury security should have no default-risk premium and liquidity-risk premium. (Round to nearest decimal place)
2. At present, the real risk-free rate of interest is 1.4%, while inflation is expected to be 1.4% for the next two years. If a 2-year Treasury note yields 4.9%, what is the maturity-risk for this 2-year Treasury note? (Round to nearest decimal place)
3. What would you expect the nominal rate of interest to be if the real rate is 3.8% and the expected inflation rate is 7.4%? (Round to nearest decimal place)
4. You are considering investing money in Treasury bills and wondering what the real risk-free rate of interest is. Currently, Treasury bills are yielding 6.1% and the future inflation rate is expected to be 3.4% per year. Ignoring the cross product between the real rate of interest and the inflation rate, what is the real risk-free rate of interest? (Round to nearest decimal place)
5. You want to invest your savings of $29,000 in government securities for the next 2 years. Currently, you can invest either in a security that pays interest of 8.4% per year for the next 2 years or in a security that matures in 1 year but pays only 6.2% interest. If you make the latter choice, you would then reinvest your saving at the end of the first year for another year.
If you choose the 2-year security, the value of your savings after the second year will be what? (Round to nearest dollar)
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