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Answered Same Day Jun 05, 2021

Solution

Shakeel answered on Jun 06 2021

145 Votes

Answer 1
(a)
Let the interest rate for year 2021 is x
Therefore,
(1+0.09)*(1+x) – 1    =    0.56
1.09*(1+x)    =    1.56
1+x    =    1.4312
X    =    0.4312
Hence, the interest rate in 2021 would be 43.12%
Now,
Let the interest rate for year 2022 is y
Therefore,
(1+0.56)*(1+y) - 1    =    1.13
1+y    =    2.13/1.56
1+y    =    1.3654
Y    =    0.3654
Hence, the interest rate in 2022 would be 36.54%
(b)
Risk premium for 2021    =    0.4312 – 0.0019    =    0.4293
Risk premium for 2022    =    0.3654 – 0.0019    =    0.3635
(c)
Let the interest rate for year 2022 is x
Therefore,
(1+0.60)*(1+x) - 1    =    1.20
1+x    =    2.20/1.60
1+x    =    1.375
x    =    0.375
Hence, the interest rate in 2022 would be 37.5%
Now,
The nominal interest rate in 2022    =    0.375 + 0.0019
                    =    0.3769 or 37.69%
(d)
Despite of negative yield, investors are still buying them because of following two reasons –
·
Buying negative yielding debt might be considered similar to paying a government to guard your money in a vault. Cash is the most liquid of assets. But central banks have imposed negative interest rates on...

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