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Module 4 Homework

Module 4 Homework

Q Create an Excel spreadsheet to organize your answers to the following problem, and submit your Excel file as an attachment by clicking on the appropriate button on this page. Part 1: Assuming that the pure rate of interest is 2%, and investors require an inflation premium of 3.5% and a risk premium of 6% to invest in a certain security, calculate the following rates using the multiplicative form of the Fisher model: 1. The nominal rate of interest on the security 2. The real rate of interest on the security 3. The risk-free rate of interest on securities of this maturity (Please carry your final answers out to 2 decimal places.) Part 2: An Inyo County California municipal bond is currently yielding 4.2%. What after-tax yield would you receive if you are in the following circumstances: 1. You are in a 28% federal tax bracket, and, as a California resident, you are in the 5% state tax bracket. 2. You are in a 33% federal tax bracket, and, as a Utah resident, you pay a 4% state income tax. 3. You are in a 15% federal tax bracket, and, as a Nevada resident, you pay no state income tax because Nevada has no income tax. (Please carry your final answers out to 2 decimal places.) Part 3: The expected return on a share of ExxonMobil stock in the U.S. is 15.6% while the expected return on a share of Royal Dutch Shell stock is 12.6% in the Netherlands. If the pure rate of return is 2% in both countries and the required risk premium is 6% for each company's stock, what is the long-term expected inflation rate in each country if the multiplicative form of the Fisher model is used in making the calculations? (Please carry your final answers out to 2 decimal places.) PreviousNext

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Part 1: #1 (1.02)(1.06)(1.035)-1=.1190 ANSWER: 11.90% #2 (1.02)(1.06)-1= .08120 ANSWER: 8.12% #3 (1.02)(1.035)-1= .05570 ANSWER 5.57% Part 2: Municipal Bonds are NOT taxable by the Federal Gov. #1 (CA) .042(1-.05)= after-tax yield CA ANSWER 4.20%