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1. Nominal Rate of Interest Suppose the real interest rate is 6 percent and the expected
inflation rate is 2 percent. What would you expect the nominal rate of interest to be?
2. Real Interest Rate Suppose that Treasury bills are currently paying 9 percent and
the expected inflation rate is 3 percent. What is the real interest rate?
1. Forward Rate
a. Assume that, as of today, the annualized two-year interest rate is 13 percent and the
one-year interest rate is 12 percent. Use this information to estimate the oneyear
forward rate.
b. Assume that the liquidity premium on a two-year security is 0.3 percent. Use this
information to estimate the one-year forward rate.
2. Forward Rate Assume that, as of today, the annualized interest rate on a three-year
security is 10 percent and the annualized interest rate on a twoyear security is 7
percent. Use this information to estimate the one-year forward rate two years from
now.
4. After-Tax Yield You need to choose between investing in a one-year municipal
bond with a 7 percent yield and a one-year corporate bond with an 11 percent yield. If
your marginal federal income tax rate is 30 percent and no other differences exist
between
these two securities, which would you invest in?
1. T-Bill Yield Assume an investor purchased a sixmonth T-bill with a $10,000 par
value for $9,000 and sold it 90 days later for $9,100. What is the yield?
2. T-Bill Discount Newly issued three-month T-bills with a par value of $10,000 sold
for $9,700. Compute the T-bill discount.
3. Commercial Paper Yield Assume an investor purchased six-month commercial
paper with a face value of $1 million for $940,000. What is the yield?
4. Repurchase Agreement Stanford Corporation arranged a repurchase agreement in
which it purchased securities for $4.9 million and will sell the securities back for $5
million in 40 days. What is the yield (or repo rate) to Stanford Corporation?
5. T-Bill Yield You paid $98,000 for a $100,000 T-bill maturing in 120 days. If you
hold it until maturity， what is the T-bill yield? What is the T-bill discount?
…
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