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1) You are given the following information:

r^* = 1.5%

Investors expect inflation to average 3% per year into the foreseeable future

The MRP on 20 year bonds = 2%

The LP on U.S. and Yubaba Inc. bonds = 0

The interest rate on a 20 year loan to Yubaba Inc. is 1.25 times the rate on a 20 year loan to the U.S. government

a) What is the interest rate on a 1 year loan to the U.S. government?

b) What is the interest rate on a 20 year loan to the U.S. government?

c) What is the DRP on a 20 year loan to Yubaba Inc.?

2) You just received a generous birthday present from your favorite Uncle -- $200 (partly a reward for the excellent grades youve been getting at Pace). You plan on investing this cash and expect to earn a return of 6% per year, compounded annually.

a) How much will your investment grow to in 10 years?

b) Your goal is to have $500 available in 10 years. What rate of return, compounded annually, would you have to earn to achieve your goal (round your answer to two decimal places)?

c) The rate of return in part b) above involves too much risk. If the maximum risk youre willing to accept involves a rate of return of 8.5% per year, compounded annually, how many years will it take to achieve your goal of $500 (round your answer to two decimal places)?

d) Suppose you could earn a rate of return of 8.5% per year, compounded daily. How long would it take to achieve your goal now (round your answer to two decimal places)?

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