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##### finance problems

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solution

**Question**

Question;P7-1. A very small country?s gross domestic product is $12 million.a. If government expenditures amount to $7.5 million andgross private domestic investment is $5.5 million, whatwould be the amount of net exports of goods and services?P7-2. How would your answer change in Problem 1 if the gross domesticproduct had been $14 million?P8-1. Assume investors expect a 2.0 percent real rate of return over thenext year. If inflation is expected to be 0.5 percent, what is theexpected nominal interest rate for a one-year U.S. Treasury security?P8-4. A thirty-year U.S. Treasury bond has a 4.0 percent interest rate. Incontrast, a ten-year Treasury bond has an interest rate of 3.7 percent.If inflation is expected to average 1.5 percentage points over both thenext ten years and thirty years, determine the maturity risk premiumfor the thirty-year bond over the ten-year bond.P8-6. You are considering an investment in a one-year government debtsecurity with a yield of 5 percent or a highly liquid corporate debtsecurity with a yield of 6.5 percent. The expected inflation rate forthe next year is expected to be 2.5 percent.a. What would be your real rate earned on either of the twoinvestments?b. What would be the default risk premium on the corporatedebt security?P8-12. A Treasury note with a maturity of four years carries a nominalrate of interest of 10 percent. In contrast, an eight-year Treasurybond has a yield of 8 percent.a. If inflation is expected to average 7 percent over the first fouryears, what is the expected real rate of interest?b. If the inflation rate is expected to be 5 percent for the firstyear, calculate the average annual rate of inflation for years2 through 4.c. If the maturity risk premium is expected to be zero betweenthe two Treasury securities, what will be the average annualinflation rate expected over years 5 through 8?

Paper#51247 | Written in 18-Jul-2015

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