1) You are considering investing money in Treasury bills and wondering what the real? risk-free rate...

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Finance

1) You are considering investing money in Treasury bills andwondering what the real? risk-free rate of interest is.? Currently,Treasury bills are yielding 4.5 % and the future inflation rate isexpected to be 2.3 % per year. Ignoring the cross product betweenthe real rate of interest and the inflation? rate, what is thereal? risk-free rate of? interest? 2)The CFO of your firm has askedyou for an approximate answer to this? question: What was theincrease in real purchasing power associated with both? 3-monthTreasury bills and? 30-year Treasury? bonds? Assume that thecurrent? 3-month Treasury bill rate is 5.45 ?percent, the? 30-yearTreasury bond rate is 7.36 ?percent, and the inflation rate is 2.94percent.? Also, the chief financial officer wants a shortexplanation should the? 3-month real rate turn out to be less thanthe? 30-year real rate. 3)At? present, the real? risk-free rate ofinterest is 1.4?%, while inflation is expected to be 1.1?% for thenext two years. If a? 2-year Treasury note yields 4.9?%, what isthe? maturity-risk premium for this? 2-year Treasury? note? 4)You've just taken a job at an investment banking firm and beengiven the job of calculating the appropriate nominal interest ratefor a number of different Treasury bonds with different maturitydates. The real? risk-free interest rate that you have been told touse is 3.8 %?, and this rate is expected to continue on into thefuture without any change. Inflation is expected to be constantover the future at a rate of 1.8 %. Since these are bonds that areissued by the U.S.? Treasury, they do not have any default risk orany liquidity risk? (that is, there is no? liquidity-risk premium).The? maturity-risk premium is dependent upon how many years thebond has to maturity.
BOND MATURES? IN:
?MATURITY-RISK PREMIUM:
?0-1 year
0.050.05?%
? 1-2 years
0.250.25?%
? 2-3 years
0.600.60?%
? 3-4 years
0.850.85?%
Given this? information, what should the nominal rate ofinterest on Treasury bonds maturing in? 0-1 year,? 1-2 years,? 2-3years, and? 3-4 years? be?

Answer & Explanation Solved by verified expert

3.9 Ratings (458 Votes)

Since multiple questions have been answered and each question is indpendent of each other I have answered the first three questions Question 1 The value of the real riskfree rate of interest is determined as follows Real RiskFree Rate of Interest Treasury Bills Yield Inflation Rate Here See Answer

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1) You are considering investing money in Treasury bills andwondering what the real? risk-free rate of interest is.? Currently,Treasury bills are yielding 4.5 % and the future inflation rate isexpected to be 2.3 % per year. Ignoring the cross product betweenthe real rate of interest and the inflation? rate, what is thereal? risk-free rate of? interest? 2)The CFO of your firm has askedyou for an approximate answer to this? question: What was theincrease in real purchasing power associated with both? 3-monthTreasury bills and? 30-year Treasury? bonds? Assume that thecurrent? 3-month Treasury bill rate is 5.45 ?percent, the? 30-yearTreasury bond rate is 7.36 ?percent, and the inflation rate is 2.94percent.? Also, the chief financial officer wants a shortexplanation should the? 3-month real rate turn out to be less thanthe? 30-year real rate. 3)At? present, the real? risk-free rate ofinterest is 1.4?%, while inflation is expected to be 1.1?% for thenext two years. If a? 2-year Treasury note yields 4.9?%, what isthe? maturity-risk premium for this? 2-year Treasury? note? 4)You've just taken a job at an investment banking firm and beengiven the job of calculating the appropriate nominal interest ratefor a number of different Treasury bonds with different maturitydates. The real? risk-free interest rate that you have been told touse is 3.8 %?, and this rate is expected to continue on into thefuture without any change. Inflation is expected to be constantover the future at a rate of 1.8 %. Since these are bonds that areissued by the U.S.? Treasury, they do not have any default risk orany liquidity risk? (that is, there is no? liquidity-risk premium).The? maturity-risk premium is dependent upon how many years thebond has to maturity.BOND MATURES? IN:?MATURITY-RISK PREMIUM:?0-1 year0.050.05?%? 1-2 years0.250.25?%? 2-3 years0.600.60?%? 3-4 years0.850.85?%Given this? information, what should the nominal rate ofinterest on Treasury bonds maturing in? 0-1 year,? 1-2 years,? 2-3years, and? 3-4 years? be?

BOND MATURES? IN:	?MATURITY-RISK PREMIUM:
?0-1 year	0.050.05?%
? 1-2 years	0.250.25?%
? 2-3 years	0.600.60?%
? 3-4 years	0.850.85?%