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Assume that the current 1-year interest rate is 1%. It is expected that the 1-year rate will rise to 3% next year, and then to 5% the following year. The market currently puts a liquidity premium of 1% on 2-year bonds and 3% 3-year bonds.
a) Using the Liquidity Premium Theory of Term Structure, what should be the current 2-year interest rate? What about the current 3-year interest rate?
b) Draw the yield curve associated with your results in part (a)
You decide to take a 30 year mortgage of $150,000 offered by the bank of Montreal. Instead of making the monthly payment of $957.68 every month, you can make half the payment every two weeks ( so that you will make 52/2=26 payments a year). How long ..
A project that provides annual cash flows of $10857 for eight years costs $76853 today. At what discount rate would you be indifferent between accepting the project and rejecting it? (Enter your answer as a percentage, omit the "%" sign in your respo..
Reynolds Corporation plans to purchase equipment at a cost of $3 million. The company's tax-rate is 30 percent and the equipment's depreciation would be $600,000 per year for 5 years. If the company leased the asset on a 5-year lease, the payment wou..
In 1893, the first Green Jacket Golf Championship was held. The winner’s prize money was $230. In 2015, the winner’s check was $1,570,000. What was the annual percentage increase in the winner’s check over this period? If the winner’s prize increases..
Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 49,000 units per year, an ordering cost of $2 per order, and carrying costs of $1.60 per unit. Wha..
Tyler Company purchased a machine 3 years ago at a cost of $150,000. It had an expected life of 10 years at the time of purchase and an expected salvage value of $5,000. Calculate project’s NPV and IRR. Make sure you carefully assess how cash flows a..
Sea Masters Co. issued $1000 par value bonds with a 8 percent coupon. The bond pays interest semi-annually and has 20 years remaining to its maturity date. If the market demands 9.7 percent required rate on the bond, what is the price of the bond?
Suppose that a firm’s recent earnings per share and dividend per share are $3.50 and $2.50, respectively. Both are expected to grow at 7 percent. However, the firm’s current P/E ratio of 16 seems high for this growth rate. Compute the dividends over ..
Maggie’s Muffins, Inc., generated $414,000.00 in sales during 2013, and its year-end total assets were $378,194.00. what is its self- supporting growth rate?
You manage a risky portfolio with expected rate of return of 18% and standard deviation of 28%. The T-bill rate (lending rate) is 8% and borrowing rate is 10%. Your client’s degree of risk aversion is A = 3.5. Calculate the Sharpe-Ratio (reward-to-va..
Preferred stock offers the issuing corporation and investors advantages and disadvantages. Which of the following statements describes a disadvantage for the issuer of preferred stock? Firms that invest in companites' preferred stock may exclude 70% ..
A transaction was recorded as a debit to phone expense and a credit to cash. After reviewing the trial balance and searching, we find that the debit should have gone to utilities expense.
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