PROBLEMS

E-book : Financial Markets and Institutions ,7th By Saunders and Cornett

Management of Financial Institutions -

1. A particular security's equilibrium rate of return is 8 percent. For all securities, the inflation risk premium is 1.75 percent and the real risk-free rate is 3.5 percent. The security's liquidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent. The security has no special covenants. Calculate the security's default risk premium.

2. You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills page 55are currently earning 3.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:

Real risk-free rate        = 2.25%

Default risk premium     = 1.15%

Liquidity risk premium   = 0.50%

Maturity risk premium   =  1.75%

a. What is the inflation premium?

b. What is the fair interest rate on Moore Corporation 30-year bonds?

18.  You note the following yield curve in The Wall Street Journal. According to the unbiased expectations theory, what is the one-year forward rate for the period beginning two years from today, ₃f₁?

19.  On March 11, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows:

₁R₁ = 4.75%,  ₁R₂ = 4.95%,  ₁R₃ = 5.25%,  ₁R₄ = 5.65%

Using the unbiased expectations theory, calculate the one-year forward rates on zero-coupon Treasury bonds for years two, three, and four as of March 11, 20XX.

26. Compute the future values of the following first assuming that payments are made on the last day of the period and then assuming payments are made on the first day of the period: