Government economists have forecasted one-year T-bill rates for the following five years as follows: You have

Government economists have forecasted one-year T-bill rates for the following five years as follows: You have

 

 

 

answer:

1- Year T- Bill rates Liquidity Premium Tbill+liquidity premium
1 4.25% 0.25% 4.50%
2 5.15% 0.25% 5.40%
3 5.50% 0.50% 6.00%
4 6.25% 0.50% 6.75%
5 7.11% 0.50% 7.61%
Year T Bill rate Market T bill rate
4 6.75% 5.75%
Decision: it would not be beneficial to purchase T Bill at a rate of 5.75% because expected rate is 6.75%
corporate bonds
2- Year coupon payment or cash flow cash flow after Tax rate = (1- tax rate)* cash flow present value at 11.5% = cash flow/(1+r)^n
1 120 78 69.955157
2 120 78 62.740051
3 120 78 56.269104
4 120 78 50.465564
5 120 78 45.260596
1000 1000 580.26405
Value of bond sum of the present value of cash flow 864.95452
Municiple Bond
Year coupon payment or cash flow cash flow after Tax rate = (1- tax rate)* cash flow present value at 7% = cash flow/(1+r)^n
1 85 55.25 51.635514
2 85 55.25 48.25749
3 85 55.25 45.100458
4 85 55.25 42.14996
5 85 55.25 39.392486
1000 1000 712.98618
Value of bond sum of the present value of cash flow 939.52209
Corporate bond would be available at a price of 864.95 so it is less costlier to purchase
Add Comment
0 Answer(s)
  • Votes
  • Oldest

Your Answer

By posting your answer, you agree to the privacy policy and terms of service.