# Bonds, TVM, Investment, Interest rates, Inflation

1. Interest rates on 1-year Treasury securities are currently 5.6 percent, while 2-year treasury securities are yielding 6 percent. If the pure expectations theory is correct, what does the market believe will be the yield on 1- year securities 1 year from now?

2. Assume that at the beginning of 1981 the expected inflation rate for 1981 was 13%, for 1982 9%, for 1983 7%, and for 1984 and thereafter 6%.

a)What was the average expected inflation rate over the 5 year period 1981-1985? (use arithmetic average)

b)What average nominal interest rate would, over the 5 year period be expected to produce a 2% real risk free rate of return on 5year treasury securities

3. What is the percent value of a perpetuity of $100 per year if the appropriate discount rate is 7%? If interest rates in general were to double and the appropriate discount rose to to 14% what would happen to the present value of of the perpetuity?

4. A friend of yours is working as an unpaid intern at a local brokerage firm and her boss is selling some securities which call for 4 payments, $50 at the end of each of the next 3 years plus a payment of $1,020 at the end of year 4. She says she can get you some of these securities at a cost of $900 each. You money is now invested in a bank that pays an 8% nominal (quoted) interest rate, but w/ quarterly compounding. You must calculate the value of the securities to decide whether they are a good investment. What is their present to you?

5.Your company is planning to borrow $1,000,000 on a 5 year, 15% annual payment fully amortized term loan. What fraction of the payment made at the end of the second year will represent repayment of principle?

6. An investment pays $20 semiannually for the next 2 years. The investment has a 7% nominal interest rate, and interest is compounded quarterly. What is the future valus of the investment?

7. Callaghan motors bonds have 10 yrs remaining to maturity. Interest is paid anually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. THe bonds have a yield to maturity of 9%. What is the current market price of these bonds?

8. A bond that matures in 7 years sells for $1,020. THe bond has a face value of $1,000 and a yield to maturity of 10.5883%. THe bond pays coupons semiannually. WHat is the bond's current yield?

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#### Solution Summary

Answers to 8 questions on Bonds, TVM, Investment, Interest rates, Inflation.

7 financial homework questions

Attached is a document with 7 finance questions.

What is an opportunity cost? How is this concept used in TVM analysis, and where is it shown on a time line? Is a single number used in all situations? Explain.

Explain whether the following statement is true or false: $100 a year for 10 years is an annuity; but $100 in Year 1, $200 in Year 2, and $400 in Years 3 through 10 does not constitute an annuity. However, the second series contains an annuity.

To find the present value of an uneven series of cash flows, you must find the PVs of the individual cash flows and then sum them. Annuity procedures can never be of use, even when some of the cash flows constitute an annuity because the entire series is not an annuity. True or false? Explain.

Banks and other lenders are required to disclose a rate called the APR. What is this rate? Why did Congress require that it be disclosed? Is it the same as the effective annual rate? If you were comparing the costs of loans from different lenders, could you use their APRs to determine the loan with the lowest effective interest rate? Explain.

Suppose you believe that the economy is just entering a recession. Your firm must raise capital immediately, and debt will be used. Should you borrow on a long-term or a short-term basis? Why?

EXPECTED INTEREST RATE The real risk-free rate is 3%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities?

DEFAULT RISK PREMIUM The real risk-free rate, r*, is 2.5%. Inflation is expected to average 2.8% a year for the next 4 years, after which time inflation is expected to average 3.75% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 8.3%,

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