Fi505

-1k* = 3%; I1 = 2%; I2 = 4%; I3 = 4%; MRP = 0; kT2 = ?; kT3 = ? k = k* + IP + DRP + LP + MRP. Since these ar Treasury securities, DRP = LP = 0. kT2= k* + IP2. IP2= (2% + 4%)/2 = 3%. kT2= 3% + 3% = 6%. kT3= k* + IP3. IP3= (2% + 4% + 4%)/3 = 3.33%. kT3= 3% + 3.33% = 6.33%. 4-2kT10 = 6%; kC10 = 8%; LP = 0.5%; DRP = ? k = k* + IP + DRP + LP + MRP. kT10 = 6% = k* + IP + MRP; DRP = LP = 0. kC10 = 8% = k* + IP + DRP + 0.5% + MRP. Because both(prenominal) bonds are 10-year bonds the flash premium and maturity date risk premium on both bonds are have-to doe with. The only difference between them is the fluidity and inadvertence risk premiums. kC10 = 8% = k* + IP + MRP + 0.5% + DRP. however we recognize from above that k* + IP + MRP = 6%; therefore, kC10= 8% = 6% + 0.5% + DRP 1.5%= DRP. 4-3kT1 = 5%; 1kT1 = 6%; kT2 = ? kT2 = = 5.5%. 4-4k* = 3%; IP = 3%; kT2 = 6.2%; MRP2 = ? kT2 = k* + IP + MRP = 6.2% kT2 = 3% + 3% + MRP = 6.2% MRP = 0.2%. 4-5 permit x equal the brook on 2-year securities 4 historic period from like a shot: 7.5% = [(4)(7%) + 2x]/6 0.45 = 0.28 + 2x x = 0.085 or 8.5%. 4-6k = k* + IP + MRP + DRP + LP. k* = 0.03. IP = [0.03 + 0.04 + (5)(0.035)]/7 = 0.035. MRP = 0.0005(6) = 0.003. DRP = 0. LP = 0. kT7 = 0.03 + 0.035 + 0.003 = 0.068 = 6.8%. 4-7a.

k1 = 3%, and k2 = = 4.5%, Solving for k1 in prey of study 2, 1k1, we obtain 1k1 = (4.5% × 2) - 3% = 6%. b.For riskless bonds below the expectations theory, the interestingness rate for a bond of any maturity is kn = k* + ordinary lump over n years . If k* = 1%, we can solve for IPn: yr! 1: k1 = 1% + I1 = 3%; I1 = expected inflation = 3% - 1% = 2%. Year 2: k1 = 1% + I2 = 6%; I2 = expected inflation = 6% - 1% = 5%. Note also that the average inflation rate is (2% + 5%)/2 = 3.5%, which, when added to k* = 1%, produces the yield on a 2-year bond, 4.5 percent. Therefore, all of our results are consistent. election base: Solve for the inflation rates in Year 1...If you indigence to get a full essay, order it on our website: OrderCustomPaper.com

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