Default risk of a corporate bond.

 

Solve three problems addressing inflation and interest rates affecting the financial environment, including the real risk-free rate, expected interest rate, detailed risk premium, and ratio analysis.
Introduction
There are different determinants of market interest rates. Try to answer such questions as, “What determines the shape of the yield curve?” and “How is the yield curve used to estimate future interest rates?,” which are important considerations for financial managers.
Overview
For this assessment, complete Problems 1–3 on inflation and interest rates affecting financial environment. You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet. In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer. Note the following:
You may need an HP 10B II business calculator.
You may use Word or Excel, but you will find Excel to be most helpful for creating spreadsheets.
If you choose to solve the problems algebraically, be sure to show your computations.
If you use a financial calculator, show your input values.
If you use an Excel spreadsheet, show your input values and formulas.
Problem 1: Real Risk-Free Rate
Current 30-day T-bills are yielding 3.5 percent. Your accountant provided you with these interest rate premiums:
IP = 1.5%
LP = 0.6%
MRP = 1.8%
DFP = 2.15%
What is the real risk-free rate of return based on this data?
Problem 2: Expected Interest Rate
For this problem, examine Treasury securities. Considering the following numbers, what would the yield on 3-year Treasury securities be?
Real risk-free = 4%.
Inflation expected at 1.5% for this year and 2% for the next 2 years.
Maturity risk premium = 0.
Problem 3: Default Risk Premium
A Treasury bond maturing in 5 years has a yield of 4 percent. A 5-year corporate bond has a yield of 7 percent. Consider that the liquidity premium on the corporate bond is 0.5 percent. If this is so, what is the default risk on the corporate bond?
Competencies Measured
By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:
Competency 1: Maximize shareholder wealth.
Compute real risk-free rate of return based on data presented.
Determine yield on 2-year and 3-year Treasury securities.
Competency 2: Evaluate the financial health of the firm
Assess the default risk of a corporate bond.

Sample Solution

Inflation and interest rates tend to move in the same direction because interest rates are the primary tool used by the Federal Reserve, the U.S. central bank, to manage inflation. One way of looking at rapidly rising prices, also known as a high rate of inflation, is as an imbalance of supply and demand. By raising short-term interest rates, and by influencing rates elsewhere in the economy, the Fed is making it more expensive to borrow money. In general, higher interest rates are a policy response to rising inflation. Conversely, when inflation is falling and economic growth slowing, central banks may lower interest rates to stimulate the economy.

nect to rehearse in associations and their constraints, offering arrangements where difficulties emerge. The article plans to reach determinations on the reasonableness of Fiedler’s Contingency Theory of Leadership, Tuckman’s Model of Group Development, Belbin’s Team Theory, and Herzberg’s Two Factor Theory practically speaking, and how intricacies like power and impact shape how they can be applied to best suit what is going on a pioneer faces.

Authority Contingency based speculations of administration recommend that there is no right or most effective way to lead a gathering, or association, because of the critical number of limitations on a circumstance (Flinsch-Rodriguez, 2019). Fiedler, in his Contingency Theory of Leadership (Fiedler, 1967), recommends that the viability of a gathering is reliant upon the authority styles of the pioneer and their favourability to the circumstance. A significant part of the hypothesis is laid out around the most un-favored colleague scale (LPC). The LPC intends to measure a potential chiefs way to deal with an errand on a size of relationship roused to task persuaded, where the pioneer fits on the scale permits what is going on to be derived, and subsequently permits the ID of reasonable pioneers for assignments. The favourableness of the circumstance relies upon three attributes: pioneer part relations, the help and trust the pioneer as from the gathering; task structure, the clearness of the undertaking to the pioneer; and positional power, the power the pioneer needs to evaluate a gatherings execution and give prizes and disciplines (Fiedler, 1967). In the event that the pioneers approach matches what is expected from going on, achievement is anticipated for the gathering. Fiedler’s possibility model offers an exceptionally severe categorisation of initiative, obviously characterizing which circumstances endlessly won’t bring about progress for an expected pioneer. At the senior administration level of a hierarchal construction inside an association the hypothesis can be applied unreservedly, right off the bat because of the simplicity at which people can be supplanted in the event that their LPC score doesn’t match that expected of the circumstance (Pettinger, 2007). Furthermore, and in particular, is to guarantee that the senior administration are ideally suited to effectively lead the association. Notwithstanding, further down the order Fielder’s possibility hypothesis starts to hold considerably less importance, it becomes unrealistic according to a hierarchical point of view because of the quantity of individuals at this degree of administration. The coordinated operations of coordinating the pioneer with their most un-favored collaborator is difficult to reliably accomplish, so a more continuum based approach is required. Figure 1: Chelladurai’s Multi-Dimensional Model of Leadership (Miller and Cronin, 2012)

There are other possibility speculations that give a more continuum based approach like Redding’s hypothesis of authority and the executives, but Fielder’s depiction of how situational factors influence the initiative style expected for the circumstance is very helpful in grasping the asset

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