Purchase Solution

Expected interest rate

Not what you're looking for?

Ask Custom Question

Assume that the real risk-free rate is 2% and that the maturity risk premium is zero. If the nominal rate of interest on 1-year bonds is 5% and that on comparable-risk 2-year bonds is 7%, what is the 1-year interest rate that is expected for Year 2?

Purchase this Solution
Solution Summary

The solution explains how to determine the 1-year interest rate that is expected for Year 2.

Solution Preview

We are given that
r* = 2%
MRP = 0
r 1year bond = 5%
r 2 year bond = 7 %
We ...

Purchase this Solution
Free BrainMass Quizzes
Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

Operations Management

This quiz tests a student's knowledge about Operations Management

SWOT

This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.

Learning Lean

This quiz will help you understand the basic concepts of Lean.

Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

View More Free Quizzes
Related BrainMass Solutions

  • Computing the expected interest rates

    interest rate for three-year bond with liquidity premium=ilp3+ie3=0.75%+5.00%=5.75% Expected interest rate for 4-year bond=ie4=?

  • Real Rate of Return, Expected Nominal Interest Rate

    If inflation is expected to be 0.5 percent, what is the expected nominal interest rate for a one-year U.S. Treasury security? Expected nominal interest rate: 1.5 % Comments Two different interest rates are used in the discussion of loans.

  • International Fisher Effect

    Expected Spot rate / Current Spot rate = (1+ US interest rate)/ (1+ Swedish interest rate) or Expected Spot rate= Current Spot rate x{ (1+ US interest rate)/ (1+ Swedish interest rate)} or Expected Spot rate= $ 0.1286 x{ (1+ 5%)/ (1+ 7%)}

  • Nominal and Real Interest Rates on a Loan

    Is the real interest rate on this loan higher or lower than expected? Real interest rate and inflation rate have an inverse relationship.

  • Interest rates and equilibrium in loanable funds market

    rate of interest and expected inflation to be constant.

  • Interest rate parity and Purchasing power parity

    Interest rate Parity condition says that the currency of a country that has a higher interest rate will depreciate against the currency of a country that has a lower interest rate Interest Rate Parity Condition: Forward rate / Spot

  • Investing

    Expected NPV at time 0: Expected Interest Rate = .5*2 + .5*3 = 2.5% P = 50/.0025 = $2000 ( which is exactly equal to our investment).

  • Using PPP/IFE to Determine Exchange Rates

    Expected Spot rate / Current Spot rate = (1+ US interest rate) / (1+ SA interest rate) Or Expected Spot rate / $ 0.158 = (1+ 10%) / (1+ 8%) Or Expected Spot rate = $ 0.158 x (1+ 10%) / (1+ 8%) = $0.161 Answer: $0.161 c.

  • Realized real rates of interest

    Thus, the expected real rate of interest is always positive.

  • International Finance: Interest Rates

    B) exhibits a low interest rate and is expected to depreciate. C) exhibits a high interest rate and is expected to depreciate. D) exhibits a high interest rate and is expected to appreciate.

View More Related Solutions