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Inflation Rates, Dividends and Treasury Securities

Need help in solving these four problems using financial calculator or clearly define steps in solving these problems.

Please use financial calculator to solve problems.

1. Vito Carleone will loan you money on a "four-for-five" arrangement, i.e., for every $4 he gives you today, you give him $5 one week from now. What is the EAR of this loan?

2. The little known monarchy of Gerberovia recently had a 5 percent inflation rate in the month of January. If the inflation rate remains at this level, what will be the annual inflation rate for Gerberovia?

3. Suppose that sales and profits of Oly Enterprises are growing at a rate of 30% per year. At the end of four years the growth rate will drop to a steady 6%. At the end of year 5, Oly will issue its first dividend in the amount of $3 per share. If the required return is 15%, what is the value of a share of stock? Assume dividends grow at the same rate as earnings after year 4.

4. Suppose that you observe the following term structure for Treasury Securities:

Maturity Yield (%)
1 Year 6.0
2 Year 6.2
3 Year 6.4
4 Year 6.5
5 Year 6.5

Assume that the pure expectations theory of the term structure is correct. What does the market expect will be the interest rate on 1-year securities two year from now?


Solution Summary

Calculation shown for you. No references.