Question

Given her evaluation of current economic conditions, Ima Nutt believes there is a 20 percent probability of recession, a 50 percent chance of continued steady growth, and a 30 percent probability of inflationary growth. For each possibility, Ima has developed an interest rate forecast for long-term Treasury bond interest rates:
ECON FORECAST INTEREST RATE FORECAST
Recession .............. 6%
Constant Growth ........... 9%
Inflation ............... 14%
a. What is the expected interest rate under Ima's forecast?
b. What is the variance and standard deviation of Ima's interest rate forecast?
c. What is the coefficient of variation of Ima's interest rate forecast?
d. If the current long-term Treasury bond interest rate is 8 percent, should Ima consider purchasing a Treasury bond? Why or why not?



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  • CreatedAugust 26, 2013
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