Purchase Solution

Finance (risk) questions: Little Monsters, Inc. as it relates to inflation, market interest rates, and more

Not what you're looking for?

Ask Custom Question

10. Little Monsters, Inc., borrowed $1,000,000 for two years from NorthernBank, Inc., at an 11.5% interest rate. The current risk-free rate is 2%, and Little Monsters' financial condition warrants a default risk premium of 3% and a liquidity risk premium of 2%. The maturity risk premium for a two-year loan is 1%, and inflation is expected to be 3% next year. What does this information imply about the rate of inflation in the second year?

14. You observe the following market interest rates, for both borrowing and lending:

One-year rate = 5%
Two-year rate = 6%
One-year rate one year from now = 7.25%

How can you take advantage of these rates to earn a riskless profit? Assume that the pure expectations theory for interest rates holds.

15. If the interest rates on one- to five-year bonds are currently 4%, 5%, 6%, 7%, and 8% and the term premiums for one- to five-year bonds are 0%, 0.25%, 0.35%, 0.40%, and 0.50%, predict what the one-year interest rate will be two years from now.

Purchase this Solution
Solution Summary

In the attached Word document, this solution uses step by step equations to find one-year interest rate, riskless profit, and rate of inflation.

Solution provided by:
Umut Oltulu, MBA
Education
  • BSc, Dokuz Eylul University
  • MBA, Texas A&M University-Kingsville
Recent Feedback
  • "Thanks"
  • "Thanks"
  • "This is a great help...Thank you"
  • "Thanks for the advice!"
  • "Oh my gosh u are awesome... A++"
Purchase this Solution
Free BrainMass Quizzes
Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Marketing Management Philosophies Quiz

A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.

SWOT

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

View More Free Quizzes
Related BrainMass Solutions

  • Inflation Premium of Interest Rates

    74065 Inflation Premium of Interest Rates Little Monsters Inc, borrowed $1,000,000 for two years from NorthernBank Inc, at an 11.5% interest rate.

  • Time Value of Money

    This is because Under Armour is a high risk bond. Interest rate and inflation are not too much of a concern at this point in time as they are both pretty low. However, default risk is high.

  • Present Value of Bonds and Time Value of Money

    Hence, the decision to buy this bond now would depend on a number of adjusting factors such as personal risk preference, inflation, interest rates, and the probability that Accuracy would not be able to pay back in one year.

  • Bonds: market effects on yield

    Because future projections become more and more uncertain as the time period increases, the yield would fluctuate. Think of it as a risk premium. It then follows that a longer period of time (long maturity bonds) will create more uncertainly.

  • Strategic Corporate Finance: Time Value of Money for Apple Inc.

    Take into consideration your own personal risk preferences, interest rates, inflation, and the probability your company will not be able to pay you back in one year. Note: no need for any math equations for this part.

  • Explain the effect default risk, inflation, interest rate risk and stock market volatility have on WACC

    Simply, bond is inversely related to the interest rates because, when interest rates go up, bond prices go down, and vice versa. Basically, long term bonds have greater interest rate risk than short bond.

  • Interest Rates and Cost of Capital

    Its key mechanism in achieving this is through lowering down interest rates, as then capital becomes more accessible to more borrowers to borrow cheaply.

  • Inflation and interest rates.

    Inflation and interest rates are discussed.

  • Questions involving a company's finances

    In this scenario, you are the only one who believes that inflation rates will drop. Therefore, market-determined interest rates and discount rates are not affected. What actions can you take to benefit from your superior forecasting ability?

View More Related Solutions