2. Today, interest rates on 1-year T-bonds yield 1.7%, interest rates on 2-year T-bonds yield 2.4%, and interest rates on 3-year T-bonds yield 3.6%.
a. If the pure expectations theory is correct, what is the yield on 1-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places.
%
b. If the pure expectations theory is correct, what is the yield on 2-year T-bonds one year from now? Be sure to use a geometric average in your calculations. Do not round intermediate calculations. Round your answer to four decimal places.
4. Your parents will retire in 28 years. They currently have $380,000 saved, and they think they will need $1,900,000 at retirement. What annual interest rate must they earn to reach their goal, assuming they don’t save any additional funds? Round your answer to two decimal places.
%
6. You have saved $4,000 for a down payment on a new car. The largest monthly payment you can afford is $350. The loan will have a 15% APR based on end-of-month payments. What is the most expensive car you can afford if you finance it for 48 months? For 60 months? Do not round intermediate calculations. Round your answers to the nearest cent.
Financed for 48 months: $
Financed for 60 months: $
8. Due to a recession, expected inflation this year is only 3.25%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3.25%. Assume that the expectations theory holds and the real risk-free rate (r*) is 2.5%. If the yield on 3-year Treasury bonds equals the 1-year yield plus 1.0%, what inflation rate is expected after Year 1? Round your answer to two decimal places.
%
9. A company’s 5-year bonds are yielding 6% per year. Treasury bonds with the same maturity are yielding 4.3% per year, and the real risk-free rate (r*) is 2.05%. The average inflation premium is 1.85%, and the maturity risk premium is estimated to be 0.1 × (t – 1)%, where t = number of years to maturity. If the liquidity premium is 0.7%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
%
10. You need $12,000 to purchase a used car. Your wealthy uncle is willing to lend you the money as an amortized loan. He would like you to make annual payments for 4 years, with the first payment to be made one year from today. He requires an 8% annual return?
- What will be your annual loan payments? Do not round intermediate calculations. Round your answer to the nearest cent.$
- How much of your first payment will be applied to interest and to principal repayment? Do not round intermediate calculations. Round your answers to the nearest cent.
Interest: $ Principal repayment: $
