FM 1 Assignment 6 Solution - 2019
FM 1 Assignment 6 Solution - 2019
FM 1 Assignment 6 Solution - 2019
Financial Management I
Chapter 6
Assignment 6 Solution
Class Examples
rT2 = r* + IP2.
IP2 = (2% + 4%)/2 = 3%.
rT2 = 3% + 3% = 6%.
rT3 = r* + IP3.
IP3 = (2% + 4% + 4%)/3 = 3.33%.
rT3 = 3% + 3.33% = 6.33%.
Q4)
a) Average inflation over 4 years = (2% +2% + 2% + 4%) / 4 = 2.5%
b) T4 = rRF + MRP4
= r* + IP4 + MRP4
= 3 + 2.5 + (0.1)*3
= 5.8%
d) T8 = r* + IP4 + MRP4
= 3 + 3.25 + (0.1)*7
= 6.95%
IP8 = (2 + 2 + 2 + 4 + 4 + 4 + 4 + 4) / 8 = 3.25%
f) T9 = r* + IP9 + MRP9
7.3 = 3 + IP9 + (0.1)*8
IP9 = 3.5%
1.062 2 1.06 1 X
1.062
2
1 X
1.06
1 X 1.064
X 6.4%
1.063
3
1 X
1.062
2
1 X 1.065
X 6.5%
1.063 1.06 1 X
3 2
1.063 3
1 X
2
1.06
1 X 1.13317
2
1 X 1.13317 1/ 2
X 6.45%
Q7) Let X equal the yield on 2-year securities 4 years from now:
(1.07)4(1 + X)2 = (1.075)6
(1.3108)(1 + X)2 = 1.5433
1/2
1.5433
1+X =
( 1.3108 )
X = 8.5%.
r = r* + IP + DRP + LP + MRP.
rT10 = 6% = r* + IP10 + MRP10; DRP = LP = 0.
Q6) Let X equal the yield on a 1-year bond 1 year from now:
(1.07)(1 + X) = (1.09)2
(1.07)(1 + X) = 1.1881
1.1881
1 + X = 1.07
X = 11.04%