The market consensus is that U.S. inflation will remain low, averaging 1% over the next 3 years. However you perceive that inflation may be higher than market estimates, averaging 2% per year. How would this affect the price you would be willing to pay for the bond?
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The market consensus is that U.S. inflation will remain low, averaging 1% over the next 3
years. However you perceive that inflation may be higher than market estimates, averaging
2% per year. How would this affect the price you would be willing to pay for the bond?
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Solved in 2 steps
- Suppose you think if you were to retire right now, you would have needed $50,000 each year to supplement your social security and maintain your desired lifestyle. But because there is on average 3% annual inflation, when you retire 30 years from now, you need more than $50,000 per year to maintain the lifestyle you like. How much will be equivalent to $50,000 at retirement time when adjusted for inflation? What will be the face value of the bond that yields the equivalent of $50,000, found in #4 of Part B in coupon payment? How much annual payment in the retirement account is needed to accumulate the amount needed to purchase the bond when retiring? What is the purchase power of the amount that will be received by your inheritors, measured in the current value of $ at the time of opening the retirement account? (Hint: First calculate what the future value will be in 30 years, which is equivalent to $50,000 now and then solve the rest of the problem).How can we determine the real (inflation-free) rate of return for a bond?What are I-bonds? Also explain inflation-adjusted interest rate.
- You are just retired, You pension company promised you that they will pay you $25,000 a year for 30 years. The first payment you will receive is a year from now. The market interest rate is 5% per year. a) What is the present value of you pension if the payment you receive will be the same for 30 years? b) What is the present value of your pension if the payment you receive will grow 3% per year to combat inflation?What type of bond is issued by state and local governments? Is there any risk that state and local governments might default on these bonds? What special feature do these bonds have that make them particularly attractive to certain taxpayers?If the yield on a 5-year Treasury bond is 7.38% and the yield on a 6-year Treasury bond is 7.83%, the expected inflation in 6 years is (Hint: Do not round intermediate calculations.)
- You have really gone above and beyond in spending on your fraternity initiation party and ran up $11, 000 on your parent's credit card. You apologize to them and promise to pay $350 per month towards paying off the balance fully. You know that the credit card interest rate is 24%. How long will it take you to fully pay off your good times? a. A bit over 4 years b. About 2 and a half years c. About 3 years d. It dependsThe real risk free rate is 3.3%. Inflation is expected to be 3.05% this year, 4.05% next year, and 2.1% thereafter. The maturity risk premium is estimated to be 0.05 x (t-1), wheret - number of years to maturity. What is the yield on a 7-year Treasury note?The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). (Round the final answers to 2 decimal places.) a. Suppose that today you buy an 9.2% annual coupon bond for $1,180. The bond has 19 years to maturity. What rate of return do you expect to earn on your investment? Expected rate of return % b-1. Two years from now, the YTM on your bond has declined by 1%, and you decide to sell. What price will your bond sell for? (Omit $ sign in your response.) Bond price $ b-2. What is the HPY on your investment? HPY %
- How do you determine how much the interest rates rise ? Why is it 2% ??Find the present and future values of an income stream of 11000 dollars a year for 17 years. The interest rate is 9% compounded continuously. Round your answers to 2 decimal places. Part 1 The present value represents the amount of money you would have to deposit today in order to match what you would get from the income stream at the future date. The formula is Present Value = M S(t)e" dt. Future value represents the total amount of money you would have if you deposit the income stream until a future date. The formula is Future Value - Present Value* erM To start our problem we need to identify the variables. Time = M = i years Rate = r = i % Income Stream S(t) = i dollars/yearCalculate the accrued interest (in $) and the total purchase price (in $) of the bond purchase. (Round your answers to the nearest cent.) Time Coupon Market Accrued Commission Bonds Total Company Since Last Rate Price Interest per Bond Purchased Price Interest Company 2 9.7 79.75 23 days $ $9.55 15 $