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Check with your local bank to find out what interest rates currently apply to (a) one-year savings certificates and (b) three-year automobile loans. Compare these nominal interest rates with the current rate of inflation as measured by the most recently announced rate of change in the consumer price index. If the current rate of inflation were to continue unchanged, what real rate of interest would you earn on the saving certificate? What real rate of interest would you pay on the loan?
Gabrielle just won $2.5 million in the state lottery. She is given the option of receiving a total of $1.3 million now, or she can elect to be paid $100,000 at the end of each of the next 25 years. If Gabrielle can earn 5% annually on her investments..
What is the implied continuously compounded risk-free rate per year that excludes arbitrage opportunity?
What rate would you expect to see on a Treasury bill. What is the clean price of the bond?
Which of the following is characteristic of fractional reserve banking?
The risk-free rate is 4% and the expected rate of return on the market protfolio is 9%. Calculate the required rate of return on a security with a beta of 1.28.
Use the following information to estimate the marginal cost of issuing a $ 1 million CD paying 3.25 percent interest. It has a one- year maturity and the following estimates apply relative to the balance obtained: Acquisition costs = 1/ 8 of 1 percen..
Seattle Health Plans currently uses zero-debt financing. Its operating income (EBIT) is $1 million, and it pays taxes at a 40% rate. It has $5 million in assets and, because it is all-equity financed, $5 million in equity. What impact would the new c..
An investment today of $26,000 promises to return $10,000 annually for the next 3 years. What is the approximate real rate of return on this investment if inflation averages 5% annually during the period?
Financial managers broaden their definition of cash to inclulde:
What is the present value of following streams of future cash flows if the discount rate is 15%?
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$ 344,000 –$ 49,000 1 51,000 24,600 2 71,000 22,600 3 71,000 20,100 4 446,000 15,200 Whichever project you choose, if any, you require a 15 percent return on ..
The real risk-free rate is 2.75%, and inflation is expected to be 3.25% for the next 2 years. A 2-year Treasury security yields 9.5%. What is the maturity risk premium for the 2-year security?
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