Question

The risk-free interest rate can be expressed as a function of which of the following?

Real rate of interest and the inflation premium |
||

Real rate of interest, inflation premium, and the default risk premium |
||

Deflation premium, real rate of interest, and the default risk premium |
||

Default risk premium, market risk premium, and the liquidity premium |

Answer #1

The risk-free interest rate can be expressed as a function of Real rate of interest and the inflation premium.

Explanation-The risk-free interest rate consists of a real risk-free rate of interest and an inflation premium

**The risk-free interest rate=real risk-free interest rate
+ inflation premium**

The inflation premium is a part of the investment return that compensates investor for the loss of purchasing power over time.

The risk-free rate is used in the calculation of the cost of equity. It is the minimum return that an investor expects from an investment.

**Cost of Equity= Risk free rate+ Beta(Market Risk
Premium- Risk free rate)**

Use Excel to find the solution to the following problems...
Suppose the real risk free rate of interest is 3%. Inflation is
expected to be 5% for 4 years and then 7% thereafter. The maturity
risk premium is 0.1%(t), where t is the number of years until
maturity. The default risk premium is 3%. The liquidity premium is
1%. What is the nominal interest rate on a 6 year bond?
Assume the yield on a 6 year treasury bond is...

For a given bond, you have the following information: Real
risk-free rate (k*)=3%, inflation premium = 8%, default risk
premium = 2%, liquidity premium = 2%, and maturity risk premium =
1%. What is the nominal risk-free rate (kRF)?

show all works
1. The real risk-free rate of interest is 1%. Inflation is
expected to be 4% the next 2 years and 7% during the next 3 years
after that. Assume that the maturity risk premium is zero. What is
the yield on 3-year Treasury securities? (5 points)
2. The real risk-free rate of interest is 2.5%. Inflation is
expected to be 2% the next 2 years and 4% during the next 3 years
after that. Assume that the...

1. The real risk-free rate, r*, is 2.25%. Inflation is expected
to average 3.8% a year for the next 3 years, after which time
inflation is expected to average 4.0% a year. Assume that there is
no maturity risk premium. A 7-year corporate bond has a yield of
8.88%, which includes a liquidity premium of 1.0%. What is its
default risk premium?

The real risk-free rate, r*, is 2%. Inflation is expected to
average 1.65% a year for the next 4 years, after which time
inflation is expected to average 5.4% a year. Assume that there is
no maturity risk premium. An 8-year corporate bond has a yield of
11.5%, which includes a liquidity premium of 0.7%. What is its
default risk premium? Do not round intermediate calculations. Round
your answer to two decimal places.

The real rate of interest of a risk free bond is equal to:
a The nominal interest rate minus the premium for expected
inflation
b The nominal interest rate plus the risk premium
c The nominal interest rate minus the risk premium
d The nominal interest rate plus a plus the premium for expected
inflation

1. The real risk-free rate is 2.6%. Inflation
is expected to be 2.15% this year, 4.15% next year, and 2.65%
thereafter. The maturity risk premium is estimated to be 0.05 × (t
- 1)%, where t = number of years to maturity. What is the
yield on a 7-year Treasury note? Do not round your intermediate
calculations. Round your answer to two decimal places.
2. A company's 5-year bonds are yielding 9.75%
per year. Treasury bonds with the same maturity...

Calculating interest rates
The real risk-free rate (r*) is 2.8% and is expected to remain
constant. Inflation is expected to be 7% per year for each of the
next four years and 6% thereafter.
The maturity risk premium (MRP) is determined from the formula:
0.1(t – 1)%, where t is the security’s maturity. The liquidity
premium (LP) on all Gauge Imports Inc.’s bonds is 1.05%. The
following table shows the current relationship between bond ratings
and default risk premiums (DRP):...

Assume that the real risk-free rate is 1.5% and that the
maturity risk premium is zero. If a 1-year Treasury bond yield is
6.4% and a 2-year Treasury bond yields 6.7%. Calculate the yield
using a geometric average.
What is the 1-year interest rate that is expected for Year 2? Do
not round intermediate calculations. Round your answer to two
decimal places.
%
What inflation rate is expected during Year 2? Do not round
intermediate calculations. Round your answer to...

Assume that the real risk-free rate is 2.4% and that the
maturity risk premium is zero. If a 1-year Treasury bond yield is
5.8% and a 2-year Treasury bond yields 6.4%. Calculate the yield
using a geometric average.
What is the 1-year interest rate that is expected for Year 2? Do
not round intermediate calculations. Round your answer to two
decimal places.
What inflation rate is expected during Year 2? Do not round
intermediate calculations. Round your answer to two...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 5 minutes ago

asked 9 minutes ago

asked 24 minutes ago

asked 33 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago