BUS FPX 4070 Assessment 2

Problem 1: Real Risk-Free Rate

Today’s 30-day T-cars have 3.5 percent returns. Your accountant provided you with this interest prize:

• IP = 1.5%
• LP = 0.6%
• MRP = 1.8%
• DFP = 2.15%

In accordance with Adam Hayes (2021), the inflation rate (IP) decreases the return on government bonds corresponding to your period of investment to calculate the real risk-free rate.

How is the real risk-free return based on this information?

[R^* = RFR – IP]

[R^* = 3.5% – 1.5%]

[R^* = 2 %]

Problem 2: Expected Interest Rate

For this problem, refer to government papers. Recalling the following values, what will be the return on 3-year government papers?

• Real risk-free = 4%.
• Inflation is expected to be 1.5% for this year and 2% for the next 2 years.
• Cold risk premium = 0.

[Return = R^* + IP + MRP]

,,,

,,

[return = 4% + 1.83%]

[return = 5.83%]

Problem 3: Default Risk Premium

The rate of a treasury that matures in 5 years is 4 percent. The corporate bond rate of 5 years is 7 percent. Remember that the liquidity premium of corporate bonds is 0.5 percent. If so, what is the standard risk of business bonds?

[Dfp = 7% – 4% – 0 – 0.5%]

[Dfp = 3% – 0.5%]

[Dfp = 2.5%]

BUS FPX 4070 Assessment 2 Inflation and Interest Rates 

Corporate Finance Institute. (Raw). Dividends. What is the return on equity (ROE)? HTS

https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-return-on-equity-roe/

Division (Raw). Get a diver. Business forecast: Why it is important from https://getdivvy.com/learn/business-forecasting/ 

Slipka, b. (2019, December 3). Forbes. Allow insight to reveal new opportunities. Four qualitative factors to consider in a commercial evaluation. https://www.forbes.com/sites/forbesfinancecouncil/2019/12/03/four-qualitative-factors-to-consider-in-a-business-valuation/?sh=24352fe5a1a8