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The following annual inflation rates are forecast for the next five years. Assume a




The following annual inflation rates are forecast for the next five years. Assume a;real risk free rate of 2.5%. Answer the questions that follow.;Year;1;2;3;4;5;Forecasted Inflation;Rates;2.0%;2.5;3.0;4.0;4.0;a. What is the appropriate rate on a 1-yr and a 5-yr loan with a 50 basis points markup?;b. How would the loan rates change if inflation increased in the first year and second;years to 3%?;3.;Answer the following questions with reference to the following data.;Treasury Bills, 90 days 0.35%;Commercial Paper, 90 days 0.75%;Treasury Bill, 1 year 0.55%;Treasury Note, 2 year 1.31%;Treasury Note, 3 year 1.94%;Corporate Bond AA, 20 year 5.67%;Municipal Bond AA, 20 year 4.78%;a. What is the implied one-year forward rate in year two on Treasuries?;b. What is the change in inflationary expectations in one year? Assume the real rate;is constant.;c. What is the default risk premium on 90-day commercial paper?;d. At what tax rate would an investor be indifferent between owning a corporate AA;and a Municipal AA?;4.;Suppose you buy a 5-year, 5 percent bond that has an original price of $1,000. In;3 years, you expect the yield on 2-year, 5 percent bonds to be 4 percent. Calculate your;total return on the 5-year bond if you were to buy it today, hold it for 3 years, and then;sell it when it is a 2-year bond. Assume you reinvested the coupon payments you;received at 5 percent, and you receive annual coupon payments.;6.;Assuming 10% reserve requirements, answer the following.;b. What is the impact on demand deposits assuming no cash drainage?;c. Assume the public wants to hold 25% of demand deposits as cash and banks;want to hold 5% as excess reserves, what is the impact on demand deposits and;M1? M1 = C+D;7.;Consider a 3-year bond selling at par with a 6% annual coupon rate. Suppose;yields on bonds of similar risk increase 50 basis points, use duration to estimate;the impact on the bonds price. Compare that with the new bond price.


Paper#30601 | Written in 18-Jul-2015

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