 # answer the questions, do not copy, answer can find on the website

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1. Nominal Rate of Interest Suppose the real interest rate is 6 percent and the expected inflation rate is 2 percent. What would you expect the nominal rate of interest to be? 2. Real Interest Rate Suppose that Treasury bills are currently paying 9 percent and the expected inflation rate is 3 percent. What is the real interest rate? 1. Forward Rate a. Assume that, as of today, the annualized two-year interest rate is 13 percent and the one-year interest rate is 12 percent. Use this information to estimate the oneyear forward rate. b. Assume that the liquidity premium on a two-year security is 0.3 percent. Use this information to estimate the one-year forward rate. 2. Forward Rate Assume that, as of today, the annualized interest rate on a three-year security is 10 percent and the annualized interest rate on a twoyear security is 7 percent. Use this information to estimate the one-year forward rate two years from now. 4. After-Tax Yield You need to choose between investing in a one-year municipal bond with a 7 percent yield and a one-year corporate bond with an 11 percent yield. If your marginal federal income tax rate is 30 percent and no other differences exist between these two securities, which would you invest in? 1. T-Bill Yield Assume an investor purchased a sixmonth T-bill with a \$10,000 par value for \$9,000 and sold it 90 days later for \$9,100. What is the yield? 2. T-Bill Discount Newly issued three-month T-bills with a par value of \$10,000 sold for \$9,700. Compute the T-bill discount. 3. Commercial Paper Yield Assume an investor purchased six-month commercial paper with a face value of \$1 million for \$940,000. What is the yield? 4. Repurchase Agreement Stanford Corporation arranged a repurchase agreement in which it purchased securities for \$4.9 million and will sell the securities back for \$5 million in 40 days. What is the yield (or repo rate) to Stanford Corporation? 5. T-Bill Yield You paid \$98,000 for a \$100,000 T-bill maturing in 120 days. If you hold it until maturity， what is the T-bill yield? What is the T-bill discount?
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Finance Questions
1. Nominal Rate of Interest Suppose the real interest rate is 6 percent and the expected
inflation rate is 2 percent. What would you expect the nominal rate of interest to be?
Solution
The calculation of the normal rate of interest is conducted as follows:
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = [(1 + 𝑟𝑒𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡) × (1 + 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛)] −
1

[(1 + 6%) × (1 + 2%)] − 1
[(1.06) × (1.02)] − 1
0.0812 = 8.12%
2. Real Interest Rate Suppose that Treasury bills are currently paying 9 percent and the
expected inflation rate is 3 percent. What is the real interest rate?
Solution
In this case, we calculate the rate of interest.
Real rate of interest = Nominal rate – Expected inflation rate
Therefore, real rate of interest = 9% − 3% = 6%

1. Forward Rate
a. Assume that, as of today, the annualized two-year interest rate is 13 percent... ### Review Anonymous
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