Type of Security Interest Rate 5-Year Treasury Note 5% 5-Year Corporate Bond (High quality) 6%

Type of Security Interest Rate  5-Year Treasury Note 5%  5-Year Corporate Bond (High quality) 6%  5-Year Corporate Bond (Low quality) 8%

Calculate the default risk premium (DRP) on the Corporate bonds. 

SOLUTION PREVIEW

DRP = i - irf

File name Type of Security Interest Rate.xlsx    File type: xlsx  PRICE: $2

If the one-year spot rate is 5% (R1) (APR) and Two-year spot rate is 5.5% (R2) (APR)

If the one-year spot rate is 5% (R1) (APR) and Two-year spot rate is 5.5% (R2) (APR) calculate the one-year rate one-year (Forward rate)(FR1) from today using pure expectations theory.

SOLUTION PREVIEW

FR1 = [(1+Rn)^n/(1+Rn-1)^n-1] - 1

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Suppose the​ risk-free interest rate is 4.0%.

Suppose the​ risk-free interest rate is 4.0%.

a. Having $200 today is equivalent to having what amount in one​ year?

b. Having  $200 in one year is equivalent to having what amount​ today?

c. Which would you​ prefer, $200 today or $200 in one​ year?

Does your answer depend on when you need the​ money? Why or why​ not?

a. Having $200 today is equivalent to having what amount in one​ year?

Having $200 today is equivalent to having in one year.​(Round to the nearest​ cent.)

$                     

b. Having $200 in one year is equivalent to having what amount​ today?

Having $200 in one year is equivalent to having today. ​(Round to the nearest​ cent.)

​$

c. Which would you​ prefer,  $200  today or $200 in one year?​(Select the best choice​ below.)

A.     $ 200 today

B.     $200 in one year

Does your answer depend on when you need the​ money? Why or why not?​(Select the best choice​ below.)

A. ​No, because if you​ didn't need it then the $200 can be invested and you could have more than $200 in one year.

B. ​Yes, because if you did need the money today it is more valuable than $200.

C. ​Yes, because if you​ didn't need​ it, it's not worth $200.

D. ​No, because if you did need it you could borrow the $200.

Click to select your answer(s).

TUTORIAL PREVIEW

Rate =	4%
Nper =	1

File name:  suppose the risk free rate.xlsx      File type: docx  PRICE: $4

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You have been offered a unique investment opportunity. If you invest $20,000 ​today

You have been offered a unique investment opportunity. If you invest $20,000 ​today, you will receive $1,000 one year from​ now, $3,000 two years from​ now, and $20,000 ten years from now.

a. What is the NPV of the investment opportunity if the interest rate is 12% per​ year? Should you take the​opportunity?

b. What is the NPV of the investment opportunity if the interest rate is 8% per​ year? Should you take the opportunity?

SOLUTION PREVIEW

a.
Year	Cash flow	PV@12%
0	-20,000	($20,000.00)
1	1,000	$892.86

File name:  You have been offered.xls      File type: xls  PRICE: $5

You run a construction firm. You have just won a contract to build

You run a construction firm. You have just won a contract to build a government office building. Building it will take one year and require an investment of $10 million today and $5 million in one year. The government will pay you $20 million upon the building’s completion. Suppose the cash flows and their times of payment are certain, and the risk-free interest rate is 10%.

a. What is the NPV of this opportunity?

b. How can your firm turn this NPV into cash today?

SOLUTION PREVIEW

NPV  =	PV Benefits -  PV Cost
PV Benefits:
Rate =	10%
Nper =	1
FV =	-20

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