Suppose the interest rate on a bond offered to investors by National Savings and Investments (a UK government bank) is 4% per year + inflation and the expected inflation rate in the UK for next year is 2.7%. A. What is the exact expected nominal interest rate for this bond next year? B. Using this numerical example, explain in your own words the difference between nominal interest rates and real interest rates. C. Assume this bond matures in five years and assume that the annual inflation rate is constant for the next five years. What would be the final payment at maturity for an investment of £120?
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- a. The spot price of the British pound is currently $1.50. If the risk-free interest rate on 1-year government bonds is 1% in the United States and 2% in the United Kingdom, what must be the forward price of the pound for delivery one year from now?b. How could an investor make risk-free arbitrage profits if the forward price were higher than the price you gave in answer to part (a)? Give a numerical example.Explanation it correctly Q)Which of the following interest rates is usually the highest? Multiple Choice 30-year mortgage rate 20-year Treasury bond rate consumer credit-card rate prime rate of banksQuestion 5 Suppose that discount bond prices are as follows: see picture a. A customer of your bank wants a forward contract to borrow $20M in three years from now for one year. What would be your quote to the customer? b. How would you confirm the rate? c. If customer accepts your offer, how would you lock-in the cash flows. Is there an arbitrage opportunity available? Show the entire cashflows chart.
- Suppose our corporation can borrow in EUR at 0.08% for 1 year. The current exchange rate is USD1.10/EUR, and the EUR is expected to appreciate against the dollar to USD1.2/EUR. What is the interest rate cost of the bond in USD? Please enter your answer as % -- e.g. if your answer is 2.34% type in 2.34.Give typing answer with explanation and conclusion Consider the prevailing condition of inflation (including changes in global oil price), the economy, budget deficit, decreases in expected remittance inflow, and the central bank monetary policy that could affect interest rate. Based on the prevailing conditions do you think bond price will increase or decreases in next six-month period. In the real economic environment which other factors may affect the bond price? Which factor in your opinion will have biggest impact on bond price? Assess the above given situations.Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on savings accounts is 0.65% at a time when inflation is around 1.45%. For the average saver, the real rate of interest on his or her savings is %. (Round your response to two decimal places and use a minus sign if necessary.) If banks expect that the rate of inflation in the coming year will be 4.45% and they want a real return of 5.5% on a certain category of loans, then the nominal rate they should charge borrowers on those loans is %. (Round your response to two decimal places. If the economy experiences an unexpectedly high rate of inflation, the group that would tend to benefit is O A. debtors (people or businesses who owe money) O B. creditors (people or institutions that are owed money) O C. both would benefit equally. O D. neither benefits.
- I (Interest rates) 1. Consider a bank account paying interest rate R2 = 4% with semi-annual compounding frequency. What is the equivalent rate R1 with yearly compounding frequency? What is the equivalent rate Rc with continuous compounding? 2. Explain briefly (in words) what are the potential pitfalls of using the Internal Rate of Return (IRR) for the evaluation of investment projects. 3. Consider the following two bonds: bond (A) is a zero-coupon bond with maturity TA and duration DA = TA; bond (B) is a coupon bond with maturity TB > TA and duration DB = TA. Which of the two bonds has a greater convexity? (Justify your answer.)The Time Value of Money. 2.1-2.2: The U.S. government has a consol bond which pays $100 per year forever. Assume the current interest rate is 3% per year. 2.1 What is the value of the consol bond immediately after a payment is made?- 2.2 What is the value of the consol bond immediately before a payment is made?- w ww w3. Present Value of Annuity and Perpetuity - Show your steps! (You must simplify your answer use the formula for Geometric series.) 1 A bond with a face value of y pays out interest at rate r annually. The discount rate you should use for the bond is i. (That is, the present value of $1 received a year from now is $11, and the present value of 1 dollar received 2 years from now is $- .) What is the present value of owning the bond that pays its first interest a year from now if (a) The bond pays interest for n years and pays back the face value at the last year. (b) The bond pays interest forever and never pays back the face value. (1+i)²
- Assume you have the following asset and liability in your Balance Sheet: Asset - Bond A Modified Duration = 2.6 years Value = RM1.5 million Liability - Bond B Modified Duration = 3.1 years Value = RM1.0 million a. Calculate the duration gap. b. What is the expected change in Net Worth if interest increases by 1%? c. What should or could you to achieve immunised balance sheet? Note: Please show all workings.Question 1. (5 marks)Is there any standard or easily identifiable debt equity ratio that will maximise the value of a firm ? Why or why not ? Question 2. (5 marks)In general, what is the formula for the present value of an annuity of C dollars per period at a discount rate of r per period, and what is the difference between an ordinary annuity and a perpetuity type annuity? Question 3. (5 marks)Does a loan where interest is compounded monthly but you do not have to make the first loan payment for six months save you money? Explain. Question 4. (5 marks)What is difference between the calculation of compounding interest and simple interest?ın which of the following situations would you prefer to be obtaining a loan? a. The interest rate is 9 % and the expected inflation rate is 6 %. b. The interest rate is 14 % and the expected inflation rate is 12 %. c. The interest rate is 18 % and the expected inflation rate is 20 % d. The interest rate is 30 % and the expected inflation rate is 55 %