FIN 3005 FIN3005 Week 2 Individual Work 1 (Everest University)

FIN 3005 FIN3005 Week 2 Individual Work 1 (Everest University)

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FIN3005 Week 2 Individual Work 1 (Everest University)

7.  Forward Rate

A. Determine the forward rate for various one-year interest rate scenarios if the two-year interest rate is 8 percent, assuming no liquidity premium. Explain the relationship between the one-year interest rate and the one-year forward rate while holding the two-year interest rate constant.

B. Determine the one-year forward rate for the same one-year interest rate scenarios described in question (a) while assuming a liquidity premium of 0.4 percent. Does the relationship between the one-year interest rate and the forward rate change when considering the liquidity premium is considered?

C. Determine how the one-year forward rate would be affected if the quoted two-year interest rate rises; hold constant the quoted one-year interest rate as well as the liquidity premium. Explain the logic of this relationship.

D. Determine how the one-year forward rate would be affected if the liquidity premium rises and if the quoted one-year interest rate is held constant. What if the quoted two-year interest rate is held constant? Explain the logic of this relationship.

 

9.  Debt Security Yield

A. Determine how the appropriate yield to be offered on a security is affected by a higher risk-free rate. Explain the logic of this relationship.

B. Determine how the appropriate yield to be offered on a security is affected by a higher default risk premium. Explain the logic of this relationship.


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