Fin 3000

Hi

Can you answer these questions?

FIN3000-005 Assignment

Read these information, and open the website down.

https://www.federalreserve.gov/faqs/money_12856.htm

http://www.bankrate.com/finance/mortgages/fed-affects-banks-rates-prices-and-jobs-1.aspx    

https://www.lendingtree.com/mortgage/affect-of-fed-on-interest-rates-article

1. Define the following. (Short answers okay)

1. 1. Opportunity Cost

   2. Risk Free Rate

   3. Inflation Premium

   4. Default Risk Premium

1. Write an essay of no more than 1 page, that summarizes the role of the Federal Reserve Bank in setting interest rates.

1. Work the following Problems.

   1. Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 3.20% peryear. What is the real risk-free rate of return, r*? Disregard any cross-product terms, i.e., if averaging is required,use the arithmetic average.

   2. Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.20%. Whatrate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid?Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

   3. Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 6.75%. Also, corporate bondshave a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on bothTreasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds?

   4. Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 2.25%, and a maturity riskpremium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity.What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOTvalid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.