finance problems
Question # 00003998
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Updated on: 11/23/2013 11:34 PM Due on: 11/28/2013
P71. A very small country’s gross domestic product is $12 million.
a. If government expenditures amount to $7.5 million and
gross private domestic investment is $5.5 million, what
would be the amount of net exports of goods and services?
P72. How would your answer change in Problem 1 if the gross domestic
product had been $14 million?
P81. Assume investors expect a 2.0 percent real rate of return over the
next year. If inflation is expected to be 0.5 percent, what is the
expected nominal interest rate for a oneyear U.S. Treasury security?
P84. A thirtyyear U.S. Treasury bond has a 4.0 percent interest rate. In
contrast, a tenyear Treasury bond has an interest rate of 3.7 percent.
If inflation is expected to average 1.5 percentage points over both the
next ten years and thirty years, determine the maturity risk premium
for the thirtyyear bond over the tenyear bond.
P86. You are considering an investment in a oneyear government debt
security with a yield of 5 percent or a highly liquid corporate debt
security with a yield of 6.5 percent. The expected inflation rate for
the next year is expected to be 2.5 percent.
a. What would be your real rate earned on either of the two
investments?
b. What would be the default risk premium on the corporate
debt security?
P812. A Treasury note with a maturity of four years carries a nominal
rate of interest of 10 percent. In contrast, an eightyear Treasury
bond has a yield of 8 percent.
a. If inflation is expected to average 7 percent over the first four
years, what is the expected real rate of interest?
b. If the inflation rate is expected to be 5 percent for the first
year, calculate the average annual rate of inflation for years
2 through 4.
c. If the maturity risk premium is expected to be zero between
the two Treasury securities, what will be the average annual
inflation rate expected over years 5 through 8?
a. If government expenditures amount to $7.5 million and
gross private domestic investment is $5.5 million, what
would be the amount of net exports of goods and services?
P72. How would your answer change in Problem 1 if the gross domestic
product had been $14 million?
P81. Assume investors expect a 2.0 percent real rate of return over the
next year. If inflation is expected to be 0.5 percent, what is the
expected nominal interest rate for a oneyear U.S. Treasury security?
P84. A thirtyyear U.S. Treasury bond has a 4.0 percent interest rate. In
contrast, a tenyear Treasury bond has an interest rate of 3.7 percent.
If inflation is expected to average 1.5 percentage points over both the
next ten years and thirty years, determine the maturity risk premium
for the thirtyyear bond over the tenyear bond.
P86. You are considering an investment in a oneyear government debt
security with a yield of 5 percent or a highly liquid corporate debt
security with a yield of 6.5 percent. The expected inflation rate for
the next year is expected to be 2.5 percent.
a. What would be your real rate earned on either of the two
investments?
b. What would be the default risk premium on the corporate
debt security?
P812. A Treasury note with a maturity of four years carries a nominal
rate of interest of 10 percent. In contrast, an eightyear Treasury
bond has a yield of 8 percent.
a. If inflation is expected to average 7 percent over the first four
years, what is the expected real rate of interest?
b. If the inflation rate is expected to be 5 percent for the first
year, calculate the average annual rate of inflation for years
2 through 4.
c. If the maturity risk premium is expected to be zero between
the two Treasury securities, what will be the average annual
inflation rate expected over years 5 through 8?

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