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Andreyy89
3 years ago
15

Due to a recession, expected inflation this year is only 3.75%. However, the inflation rate in Year 2 and thereafter is expected

to be constant at some level above 3.75%. Assume that the expectations theory holds and the real risk-free rate (r*) is 3.5%. If the yield on 3-year Treasury bonds equals the 1-year yield plus 0.5%, what inflation rate is expected after Year 1
Business
1 answer:
Solnce55 [7]3 years ago
4 0

Answer:

5.25%

Explanation:

To calculate the inflation for the year 3, we will have to calculate the yield on 1 Year treasury bond.

The yield is calculated using the following formula:

Nominal Yield on Bond = Real risk free rate + Inflation for the year

Here

Inflation for Year One is 3.75%

Real Risk-Free Rate is 3.5%

Nominal yield on bond is Y for year 1

By putting values, we have:

Y = 3.5% + 3.75% = 7.25%

For 3 years treasury bond,

Nominal Yield on Treasury Bond  for 3 years = Yield on year 1 + Inflation

Y3 = 7.25% + 1.5% = 8.75 %

Now if we deduct the real risk free rate from the  3 year yield on the treasury bond, then the resultant rate would be the inflation rate for the year 3.

Inflation Rate for Year 3 = Y3 - Real Risk-Free Rate

Inflation Rate for Year 3 = 8.75% - 3.5%

Inflation Rate for Year 3 = 5.25%

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Grecian Tile Manufacturing of Athens, Georgia, borrows $1,500,000 at LIBOR plus a lending margin of 1.25 percent per annum on a
shtirl [24]

Answer: 92812.50

Explanation:

The following information can be derived from the question:

Loan principal = $1,500,000

LIBOR for 1st 6 months = 4.50%

LIBOR for last 6 months = 5.375%

Lending margin per annum = 1.25%

The interest will then be:

= 1,500,000 × [(4.50% + 1.25%)/2] + 1,500,000 × [(5.375% + 1.25%)/2]

= 1,500,000 × [(0.045 + 0.0125)/2] + 1,500,000 × [(0.05375 + 0.0125)/2]

= 92,812.50

Therefore, the interest is 92812.50.

8 0
2 years ago
Treasury bills are currently paying 7 percent and the inflation rate is 3.2 percent. a. What is the approximate real rate of int
FromTheMoon [43]

Answer:

The real risk free rate is 3.8%

The exact risk-free rate is 3.68%

Explanation:

The interest rate on the Treasury bills is usually a combination of real risk free rate and inflation rate to compensate investors for average inflation in the economy during the instrument lifetime which equals nominal risk-free rate.

nominal risk-free rate = real risk-free rate+inflation rate

nominal risk-free rate=7%

inflation rate=3.2%

real risk-free rate=7%-3.2%

real risk-free rate=3.8%

The exact real risk-free rate can be computed thus:

nominal rate+1=(real risk-free rate+1)*(inflation rate+1)

real risk-free rate=(nominal rate+1)/(inflation rate+1)-1

real risk free rate=(1.07/1.032)-1

real risk-free rate=0.036821705

real risk-free rate=3.68%

5 0
3 years ago
In its statement of cash flows issued for the year ending September 30, Berne Company reported a net cash inflow from operating
Dafna1 [17]

Answer:

B. $29,000

Explanation:

The cashflow from operating activities is calculated as below:

Cashflow from operating activities = Net income + Depreciation - Working capital investment

                                                          = Net income + Depreciation - (Change in inventories + Change in account receivables - Change in account payables)

Putting all the number together, we have:

123,000 = Net income + 38,000 - [(-27,000) + 31,000 - 48,000 - 12,000),

Solve the equation we get Net income = 29,000.

5 0
3 years ago
I can only put away $2,000 a year toward retirement. I am 25 and plan on retiring at 65 and earning 5%. How much will I have at
Scorpion4ik [409]

Answer: $241,600

Explanation:

As this amount is a constant amount, it is an annuity. To find out the total amount after a certain period of time, use the future value of annuity formula.

Future value of annuity = Amount * [ {( 1 + rate) ^number of periods - 1} / rate]

Number of periods = 65 - 25 = 40

Future value of annuity = 2,000 * [ {(1 + 5%)⁴⁰ - 1} / 5%]

= 241,599.54

= $241,600

3 0
3 years ago
Each year a company selects a number of employees for a management training program. On average, 60 percent of those sent comple
Gnesinka [82]

Answer:

the probability that exactly 8 complete the program is 0.001025

Explanation:

given information:

60 % of those sent complete the program, p = 0.6

the total of people being sent, n = 27

exactly 8 complete the program, x = 8

to find the probability, we can use the following formula

P(X=x)=\left[\begin{array}{ccc}n\\x\\\end{array}\right] p^{x} (1-p)^{n-x}

P(X=8)=\left[\begin{array}{ccc}27\\8\\\end{array}\right] 0.6^{8} (1-0.6)^{27-8}

P(X=8)=\left[\begin{array}{ccc}27\\8\\\end{array}\right] 0.6^{8} (0.4)^{19}

                = 0.001025

3 0
3 years ago
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