Question

1.

Suppose the real rate is 4.5 percent and the inflation rate is 2.6 percent. What rate would you expect to see on a Treasury bill?

7.22%

7.94%

6.13%

6.50%

8.30%

2.

Seether Co. wants to issue new 15-year bonds for some much-needed expansion projects. The company currently has 6.8 percent coupon bonds on the market that sell for $864.96, make semiannual payments, and mature in 15 years. What coupon rate should the company set on its new bonds if it wants them to sell at par?

8.40%

4.20%

8.10%

8.70%

8.30%

Answer 1

1	(1 + R) = (1 + r)(1 + h)
	r= [(1 + .045) / (1.026)] – 1 = .0722 or 7.22%
2	Coupon + ((redemption value - issue price)/life)) / (redemption value + issue price)/2)
	34 + ((1000 - 864.96)/30)) / (1000 + 864.96)/2)
	38.5013 / 932.48
	4.13
	So appoximatly 4.20%