E4 A E H #1 1 fx B C D F G The current risk free rate on Treasury bills is 2.40%, and inflation is about 1.3%. What is the real rate of return on Treasury bills? 3 4 Real rate of return on Treasury bills: 5 2 6 7 Explain in your own words what the "real rate of return" means. 8 As an investor, do you like the number you calculated above? 9 B E H #2 E6 fx A D F G 1 The nominal return on Treasury bonds is 2.7%, the maturity risk 2 premium is 0.2%, and the real return you can earn is 0.3%. What is the inflation premium? 3 4 5 6 Inflation premium on US treasury bonds: 7 8 Why is there a maturity risk premium on US treasury bonds versus bills? 9 F4 #3 1 B D E G H ] What is the nominal return on short-term corporate paper if the liquidity premium is 2 0.5%, the default risk premium is 0.7%, and the inflation rate is 1.4%? Assume 0% real return. 3 4 Nominal return on short term commercial paper: 5 6 Assume both Apple and Rocky Mountain Chocolate Factory sell short-term corporate paper to investors. If Apple's yield to investors is 3% and RMCF's is 4.3%, and both companies sell 8 3-month paper, what factor explains this difference? 9 10 11 2 3 #4 4 Calculate the difference and explain the reason using terms/concepts from the chapter. 4 Difference in yield 5 6 Reason 7 8 Corporate (commercial) paper currently yields 3% and corporate bonds currently yield 9 4.2%. Calculate the difference and explain the reason using terms/concepts from the chapter. 10 11 Difference in yield 12 13 Reason 14 15 Now compare Treasury bonds and Corporate bonds. What's the difference in yield? 16 Explain the reason using terms/concepts from the chapter. 17