Financial Environment and Interest Rate and Inflation
An Assignment of Business Finance Course Code: FIN -2101
Submitted To:
Md. Monzur Morshed Bhuiya Associate Professor Department of Finance Jagannath University, Dhaka.
Submitted By:
Md. Mazharul Islam. Group Representative of Finance Interface B.B.A, 3rd Batch (2nd Year, 1st Semester) Session: 2008-2009 Department of Finance Jagannath University, Dhaka.
Date of Submission: 25-10-2010
Department of Finance
Jagannath University
1|Page
1
Sl. No. Name 01. Md. Mazharul Islam. (Group Representative) 02. Khadizatuz Zohara. Roll No. 091541 091526
Department of Finance Jagannath University 2|Page
Table of Contents
Sl. No. 2-1 2-2 2-3 2-4 2-5 2-6 2-7 2-8 2-9 2-10 2-11
Contents Problems Yield Curves Yield Curves Inflation and Interest Rate Rate of Interest Real Risk-Free Rate, MRP and DRP Exam-Type Problems Expected Inflation Rate Expected Rate of Interest Expected Rate of Interest Interest Rate Interest Rate Expected Rate of Interest Ending Part Formula and Necessary Illustration for Calculation Summary of the Assignment
Page No. 5 6 7 9 10 12 13 14 14 15 16 17 18
Department of Finance
Jagannath University
3|Page
The Financial Environment: Interest Rates
Problems 2-1:
Suppose you and most other investors expect the rate of inflation to be 7 percent next year, to fall to 5 percent during the following year, and then to remain at a rate of 3 percent thereafter. Assume that the real risk-free rate, k*, is 2 percent and that maturity risk premium on treasury securities rise from zero on very short-term bonds ( those that mature in few days) by 0.2 percentage points for each year to maturity, up to a limit of 1.0 percentage point on five year or longer-term T-bonds. a. Calculate the interest rate on one, two, three, four, five, 10 and 20 year Treasury securities, and Plot the yield curve. b. Now suppose IBM, a highly rated company, had bonds with the same- maturities as the Treasury bonds. As an approximation, plot a yield
Submitted To:
Md. Monzur Morshed Bhuiya Associate Professor Department of Finance Jagannath University, Dhaka.
Submitted By:
Md. Mazharul Islam. Group Representative of Finance Interface B.B.A, 3rd Batch (2nd Year, 1st Semester) Session: 2008-2009 Department of Finance Jagannath University, Dhaka.
Date of Submission: 25-10-2010
Department of Finance
Jagannath University
1|Page
1
Sl. No. Name 01. Md. Mazharul Islam. (Group Representative) 02. Khadizatuz Zohara. Roll No. 091541 091526
Department of Finance Jagannath University 2|Page
Table of Contents
Sl. No. 2-1 2-2 2-3 2-4 2-5 2-6 2-7 2-8 2-9 2-10 2-11
Contents Problems Yield Curves Yield Curves Inflation and Interest Rate Rate of Interest Real Risk-Free Rate, MRP and DRP Exam-Type Problems Expected Inflation Rate Expected Rate of Interest Expected Rate of Interest Interest Rate Interest Rate Expected Rate of Interest Ending Part Formula and Necessary Illustration for Calculation Summary of the Assignment
Page No. 5 6 7 9 10 12 13 14 14 15 16 17 18
Department of Finance
Jagannath University
3|Page
The Financial Environment: Interest Rates
Problems 2-1:
Suppose you and most other investors expect the rate of inflation to be 7 percent next year, to fall to 5 percent during the following year, and then to remain at a rate of 3 percent thereafter. Assume that the real risk-free rate, k*, is 2 percent and that maturity risk premium on treasury securities rise from zero on very short-term bonds ( those that mature in few days) by 0.2 percentage points for each year to maturity, up to a limit of 1.0 percentage point on five year or longer-term T-bonds. a. Calculate the interest rate on one, two, three, four, five, 10 and 20 year Treasury securities, and Plot the yield curve. b. Now suppose IBM, a highly rated company, had bonds with the same- maturities as the Treasury bonds. As an approximation, plot a yield