the intrest rate outlook for montrose inc a large financially sound company is r
ID: 2669398 • Letter: T
Question
the intrest rate outlook for montrose inc a large financially sound company is reflected in the following information.1) the pure rate of interest rate is 4%
2) inflation is expected to increase in the future from its current low level of 2% prediticted annual inflation rates follow
year inflation rate
1 2%
2 3
3 4
4 5
5-20 6
3) the default risk premium will be .1% for one year debt but will increase by .1% for each additional year of the term to a maximum of 1%
4) the liquidity premium is zero for one year and two year debt ,.5% for three ,four, and five year terms and 1%for longer issues.
5)the maturity risk premium is zero for a one year term and increases by .2% for each additional year of term to a maximum of 2%.
a)use the interest rate model to estimate market rates on the firms debt securities of each of the following terms 1-5 years, 10years,and 20 years.
b)plot a yeild curve for the firms debtc
c) using different colors on athe same graph scetch yeild curves for federal goverment debt and shaky inc a firm currently in financial difficulty.
d) explain the pattern of deviation from montrose's yeild curve for each of the others
Explanation / Answer
Term
kpr
infl
dr
lr
mr
k
1
4
2.0
0.1
0
0.0
6.1%
2
4
2.5
0.2
0
0.2
6.9%
3
4
3.0
0.3
0.5
0.4
8.2%
4
4
3.5
0.4
0.5
0.6
9.0%
5
4
4.0
0.5
0.5
0.8
9.8%
10
4
5.0
1.0
1.0
1.8
12.8%
20
4
5.5
1.0
1.0
2.0
13.5%
Term
kpr
infl
dr
lr
mr
k
1
4
2.0
0.1
0
0.0
6.1%
2
4
2.5
0.2
0
0.2
6.9%
3
4
3.0
0.3
0.5
0.4
8.2%
4
4
3.5
0.4
0.5
0.6
9.0%
5
4
4.0
0.5
0.5
0.8
9.8%
10
4
5.0
1.0
1.0
1.8
12.8%
20
4
5.5
1.0
1.0
2.0
13.5%
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