Because of a recession, the inflation rate expected for the coming year is only [i1]%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above [i1]%. Assume that the real risk-free rate is r* = [rf]% for all maturities and that there are no maturity risk premiums. If [n]-year Treasury notes yield [x] percentage points more than 1-year notes, what inflation rate is expected after Year 1? Round your answer to two decimal places and express in percentage form (x.xx%).

Define the real risk-free rate of interest. It changes over time depending (primarily) upon which two economic conditions?

You currently have a 30-year fixed-rate mortgage financed at 6.25% on a $134,000 home. There are 15 years remaining on the mortgage.  Your banker friend tells you that for a small fee (2.5% of the principal borrowed), you can refinance the remaining balance of your mortgage at a fixed rate of 6.00% for 15 years.  What is the present value of the savings/loss to refinancing? If there is a loss to refinancing, enter the number as a negative. Round your answer to the nearest cent.

Why do investors require an inflation premium as part of their total return on a security (like a bond)?

Organic Produce Corporation has 9 million shares of common stock outstanding, 650,000 shares of 8% preferred stock outstanding (par value of $100), and 210,000 of 9.5% semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $75.25 per share and has a beta of 1.57, the preferred stock currently sells for $112.98 per share, and the bonds have 25 years to maturity and sell for 96.7% of par. The market risk premium is 5.3%, T-bonds are yielding 4.2%, and the firm’s tax rate is 31%. What is the firm’s weighted average cost of capital? Do not round calculations in intermediate steps. Round your answer to two decimal places and express in percentage form.

Six years from today, you expect to place a down payment on a house.  If the required down payment is $22,000 and the interest rate is 5.65% compounded monthly, how much must you save each month (the first savings deposit occurs today, the last 6 years from today)? Round your answer to the nearest cent.

Why do investors require an inflation premium as part of their total return on a security (like a bond)?

Under what market conditions would an investor be more likely to receive yield to call (YTC) than yield to maturity (YTM) on a bond investment? Why?

Several years ago, Lucian Technologies issued preferred stock with a stated annual dividend of [d]% of its $[p] par value. Preferred stock of this type currently yields [r]%. Assume dividends are paid annually. What is the estimated value of Lucian’s preferred stock? Round your answer to the nearest cent. 

Below are the formulas for Exam 2: