Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Textbook Question
Chapter 6, Problem 6.1P
Interest rate fundamentals: The real
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on
savings accounts is 0.65% at a time when inflation is around 1.45%.
For the average saver, the real rate of interest on his or her savings is %. (Round your response to two decimal places and use a minus sign if necessary.)
If banks expect that the rate of inflation in the coming year will be 4.45% and they want a real return of 5.5% on a certain category of loans, then the nominal rate they
should charge borrowers on those loans is %. (Round your response to two decimal places.
If the economy experiences an unexpectedly high rate of inflation, the group that would tend to benefit is
O A. debtors (people or businesses who owe money)
O B. creditors (people or institutions that are owed money)
O C. both would benefit equally.
O D. neither benefits.
Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on savings accounts is 0.45% at a time when infialion is around 0 9%
For the average saver, the real rate of interest on his or her savings is % (Round your response to two decimal places and use a minus sign if necessay.)
Il banks expect that the rate of inflation in the coming year will be 3.9% and they want a real return of 8% on a certain category of loans, then the nominal rate they should charge borrowers on those loans is %. (Round your response to two decimal places)
11 the economy experiences an unexpectedly high rate of inflation, the group that would tend to benefit is
O A. creditors (people or institutions that are owed money).
O B. deblors (pcople or businesses who owe moncy).
OC. both would benefit cgqually
O D. neilher bencfits.
You are considering investing money in Treasury bills and wondering what the real risk-free rate of interest is. Currently, Treasury bills are yielding 4.3% and the future inflation rate is expected to be 2.5% 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?
Chapter 6 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 6.1 - What is the real rate of interest? Differentiate...Ch. 6.1 - What is the term structure of interest rates, and...Ch. 6.1 - For a given class of similar-risk securities, what...Ch. 6.1 - Prob. 6.4RQCh. 6.1 - List and briefly describe the potential issuer-...Ch. 6.2 - What are typical maturities, denominations, and...Ch. 6.2 - Differentiate between standard debt provisions and...Ch. 6.2 - How is the cost of bond financing typically...Ch. 6.2 - Prob. 6.9RQCh. 6.2 - Prob. 6.10RQ
Ch. 6.2 - Compare the basic characteristics of Eurobonds and...Ch. 6.3 - Why is it important for financial managers to...Ch. 6.3 - Prob. 6.13RQCh. 6.3 - Prob. 6.14RQCh. 6.3 - Prob. 6.15RQCh. 6.4 - Prob. 6.16RQCh. 6.4 - What relationship between the required return and...Ch. 6.4 - If the required return on a bond differs from its...Ch. 6.4 - As a risk-averse investor, would you prefer bonds...Ch. 6.4 - What is a bonds yield to maturity (YTM)? Briefly...Ch. 6 - Learning Goals 5, 6 ST6- 1 Bond valuation Lahey...Ch. 6 - Learning Goal 1 E6-1 The nominal, risk-free rate...Ch. 6 - The yields for Treasuries with differing...Ch. 6 - The YTMs for Treasuries with differing maturities...Ch. 6 - Assume that the rate of inflation expected over...Ch. 6 - Calculate the risk premium for each of the...Ch. 6 - You have two assets and must calculate their...Ch. 6 - Prob. 6.7WUECh. 6 - Assume a 5-year Treasury bond has a coupon rate of...Ch. 6 - Interest rate fundamentals: The real rate of...Ch. 6 - Prob. 6.2PCh. 6 - Prob. 6.3PCh. 6 - Yield curve A firm wishing to evaluate interest...Ch. 6 - Term structure of interest rates The following...Ch. 6 - Bond interest payments before and after taxes...Ch. 6 - Prob. 6.11PCh. 6 - Prob. 6.13PCh. 6 - Prob. 6.14PCh. 6 - Bond valuation: Annual interest Calculate the...Ch. 6 - Prob. 6.20PCh. 6 - Bond valuation: Semiannual interest Find the value...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Give typing answer with explanation and conclusion Consider the prevailing condition of inflation (including changes in global oil price), the economy, budget deficit, decreases in expected remittance inflow, and the central bank monetary policy that could affect interest rate. Based on the prevailing conditions do you think bond price will increase or decreases in next six-month period. In the real economic environment which other factors may affect the bond price? Which factor in your opinion will have biggest impact on bond price? Assess the above given situations.arrow_forwardIn general, how do credit analysts determine the risk-free rate? Choose all that apply. The rate of return on S&P 500 | The average corporate yield The 10-year Treasury yield The yield on a 3-month U.S. Treasury Billarrow_forwardof interest? The exact real rate? 10. Inflation and Nominal Returns Suppose the real rate is 1.8 percent and the inflation rate is 3.7 percent. What rate would you expect to see on a Treasury bill? 11. Nominal and Real Returns An investment offers a total return of 12 percentarrow_forward
- Negative inflation (deflation), nominal interest rates, and real rates. The Republic of Northern Lights, a small, stable country in the North Atlantic, is experiencing a negative inflation rate (deflation) at this time. The annual inflation rate is - 2%. If the nominal rate of interest is 6.5%, what are the real interest rates that the Northern Lightians are getting as a reward for waiting? Use the approximate nominal interest rate equation and the true nominal interest rate equation to determine the rates. Using the approximate nominal interest rate equation, what is the real interest rate that the Northern Lightians are getting as a reward for waiting? % (Round to two decimal places.)arrow_forwardAn Overview of Financial Management and the Financial Environment Differentiate between the following types of markets: physical asset vs. financial markets, spot vs. futures markets, money vs. capital markets, primary vs. secondary markets, and public vs. private markets the real risk free rate of interest is 3%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium (MRP) is zero. What is the yield on a 2 year Treasury security? What is the yield on 3 year Treasury securities? If Apple Computer decided to issue additional common stock, and someone purchased 100 shares of this stock from Merrill Lynch, the underwriter, would this transaction be a primary market transaction or a secondary market transaction? Would it make a difference if the investor purchased previously outstanding Apple stock in the dealer market?arrow_forward(Expected rate of return and risk) B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 4.8 percent. Calculate the investment's expected return and its standard deviation. Should Gautney invest in this security? Probability Return 0.10 −6 % 0.35 4 % 0.45 5 % 0.10 10 % (Click on the icon in order to copy its contents into a spreadsheet.) Question content area bottom Part 1 a. The investment's expected return is enter your response here%. (Round to two decimal places.)arrow_forward
- The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. Q. Suppose the yield on a two-year Treasury security is 5.83%, and the yield on a five-year Treasury security is 6.20%. Assuming that the pure expectations theory is correct, what is the market’s estimate of the three-year Treasury rate two years from now? (Note: Do not round your intermediate calculations.) a. 6.45% b. 6.69% c. 5.46% d. 6.61%arrow_forwardWith interest rates on the rise, many Americans are wondering what theirinvestment strategy should be. A safe (i.e., a virtually risk-free) and increasingly popular way to keep pace with the cost of living is to purchase inflation-indexed government bonds. These so-called I-bonds pay competitive interest rates and increase in value when the CPI rises. These bonds can be held for up to 30 years. Suppose you purchased an I-bond for $10,000 and held it for 11 years, at which time you received $20,000 for the bond. Inflation has averaged 3% per year during this 11-year period. What real annual rate of return did you earn on your inflation-adjusted I-bond? Is it really competitive?arrow_forwardThe federal funds rate set by the Fed is 4%, and inflation is 3%. The real interest rate that people can borrow money at is 1.5%. Draw an MP curve. Determine the risk premium. Label it and the risk-free interest rate on your graph Illustrate how the MP curve will change if the risk premium increased. Please type out your answer!!arrow_forward
- Kamada: UIA Japan (B). Takeshi Kamada, Credit Suisse (Tokyo), observes that the */$ spot rate has been holding steady, and that both dollar and yen interest rates have remained relatively fixed over the past week. Takeshi wonders if he should try an uncovered interest arbitrage (UIA) and thereby save the cost of forward cover. Many of Takeshi's research associates and their computer models are predicting the spot rate to remain close to ¥118.00/$ for the coming 180 days. Using the data below, analyze the UIA potential. Arbitrage funds available Spot rate (*/S) 180-day forward rate (\/$) Expected spot rate in 180 days (\/S) U.S. dollar annual interest rate Japanese yen annual interest rate $ 5,000,000 118.54 117.76 118.00 4.796 % 3.404 % C and invest in the The UIA profit potential is %, which tells Takeshi Kamada that he should borrow to three decimal places and select from the drop-down menus.) If his expectations about the future spot rate, the one in effect in 180 days. prove…arrow_forwardThe 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. Req A 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 %arrow_forwardExpected rate of return and risk) B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 2.0 percent. Calculate the investment's expected return and its standard deviation. Should Gautney invest in this security? Probability Return 0.20 −7 % 0.30 1 % 0.30 3 % 0.20 7 %arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Business/Professional Ethics Directors/Executives...AccountingISBN:9781337485913Author:BROOKSPublisher:Cengage
Business/Professional Ethics Directors/Executives...
Accounting
ISBN:9781337485913
Author:BROOKS
Publisher:Cengage
Risk and return of individual securities; Author: BMOCommunity;https://www.youtube.com/watch?v=ubiUxiTgIfw;License: Standard youtube license