Inflation Rates, Dividends and Treasury Securities

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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?

Expectations theory: what should be the interest rate on 3-year, risk-free securities?
The real risk-free rate of interest is 3 percent. Inflation is expected to be 2 percent this year, and 4 percent during the next two years. Assume that the maturity risk premium is zero. What is the yield on 2-year TreasurySecurities? W

Predict what will happen to interest rates on a corporation's bonds if the federal government guarantees today that it will pay creditors if the corporation goes bankrupt in the future. What will happen to the interest rates on Treasurysecurities?

Investors expect the inflation rate to be 7% next year, to fall to 5% during the following year, and then to remain at a rate of 3% thereafter. Assume that the real risk free rate, r*, will remain at 2% and that maturity risk premiums on Treasurysecurities rise from zero on very short term securities to a level of .2% for 1-ye

6-1 The following yields on U. S. Treasurysecurities were taken from a recent financial publication:
Term Rate
6 months 5.1%
1 year 5.5
2 years 5.6
3 years 5.7
4 years 5.8
5 years 6.0
10 years 6.1
20 years 6.5
30 years 6.3
a. Plot a yield curve based on these data.
b. What type of yi

An investor in Treasurysecurities expects inflation to be 2.5% in Year1,3. 2% in Year 2, and 3.6% each year thereafter. Assume that the real risk-free rate is 2.75%, and that this rate will remain constant over time. Three-year Treasurysecurities yield 6.25%, while 5-year Treasurysecurities yield 6.80%. What is the differen

The real risk free rate of interest is 3%. Inflation is expected to be 2% this year and 4 percent during the next two years. Assume that the maturity risk premium is zero. What is the yield on a two year treasury security? What is the yield on a 3 year treasury security?

Interest rates on 4-year Treasurysecurities are currently 7 percent, while interest rates on 6-year Treasurysecurities are currently 7.5%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now?

One year treasurysecurities yield 6.9 percent, while 2-year Treasurysecurities yield 7.2 percent. If the expectations theory is correct (that is, the maturity risk premium = 0) what does the market anticipate will be the yield on 1-year treasurysecurities on one year from now?
a. 6.0%
b. 6.7%
c. 7.2%
d. 7.5%

You are considering an investment in U.S. Treasury bond but are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.5%; inflation is expected to be 4.5%; that maturity risk premium is 5.0%; and the default risk premium for AAA rate corporate bonds is 4.0%. What rate of interest shou