Problem 1: Real Risk-Free Rate
BUS FPX 4070 Assessment 2 The existing 30-day T-cars are 3.5 percent returns. Your accountant provided you with this interest award:
•IP = 1.5%
• LP = 0.6%
• MRP = 1.8%
• DFP = 2.15%
As per Adam Hayes (2021), to find the real risk -free rate, the inflation rate (IP) lowers the return on government bonds equivalent to your investment duration.
What 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. Keep the following values in mind, what will be the return on 3-year government papers?
• Real risk free = 4%.
• For this year inflation is expected to be 1.5% and for the next 2 years 2%.
• Cold risk premium = 0.
[Return = R^* + IP + MRP]
,,
[\ text {return} = 4 \% + 1.83 \%]
[\ text {return} = 5.83 \%]
Problem 3: Default Risk Premium
The yield of a treasury that mature in 5 years is 4 per cent. The 5 -year corporate bond rate is 7 percent. Keep in mind that the liquidity premium on corporate bonds is 0.5 per cent. If so, what is the standard risk of business bonds?
,,
[Dfp = 7 % – 4 % – 0 – 0.5 %]
[Dfp = 3 % – 0.5 %]
[Dfp = 2.5 %]
References
Brigham. (Raw.). The basic principle of financial management. https://capella.vitalsource.com/reader/books/9780357088562/epubcfi/6/36[%3Bvnd.vst.idref%3DM18]!/4/204/9:237[at%20%2Csho]
Hayes, A. (2021, August 30). Investopedia. Risk -free return. What is the risk -free return? https://www.investopedia.com/terms/r/riskfreerate.asp#:~:text=To%20calculate%20the%20real%20risk,bond%20matching%20your%20investment%20duration.
MICKER DUM Employed. (2016, November 2). Motley Fool. How to find standard risk premiums on corporate bonds. Why you should care about the standard risk premium for bonds and discover it.https://www.fool.com/knowledge-center/how-to-find-a-default-risk-premium-on-a-corporate.aspx#:~:text=The%20default%20risk%20premium%20is,bond%20you%20wish%20to%20purchase.
BUS FPX 4070 Assessment 2 Inflation and Interest Rates
Corporate Finance Institute. (Raw.). Dividends. What is the return on equity (ROE). HTS
Division. (Raw.). Get a diver. Business forecast; Why it is important from https://getdivvy.com/learn/business-forecasting/
McCler, B. (2021, December 29). Investopedia. How to use Roa to judge a company’s financial results.https://www.investopedia.com/articles/fundamental/04/012804.asp#:~:text=Return%20on%20assets%20(ROA)%20is,its%20assets%20to%20generate%20profits.
Slipka, b. (2019, December 3). Forbes. Allow insight to reveal new opportunities. Four qualitative factor 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
