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Name: Instructor: Course: Date: Chapter 6 Question 8 Suppose interest rates on Treasury bonds rose from 5% to 9% as a result of higher interest rates in Europe. What effect would this have on the price of an average company’s common stock? If the interest rates of treasury bonds increase as suggested from 5% to 9% the demand for the company common stock will decrease. This is because by interest on treasury bonds increasing the cost of borrowing is increased as companies will have to pay higher interest rates when issuing their own. Chapter 6 Problem 3 For this question please view screenshot 6-1 diagram EXPECTED INTEREST RATE The real risk-free rate is 3%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities? For the 3 year treasury bond Yr = y* + T + Mp Mp= maturity risk premium. Y = Number of years. Yr= Yield rate T = average inflation for the period r = 3 + ((2+4+4)/3) + 0 r = 6.33% For 2 year treasury bond Yr = y* + T + Mp r = 3 + ((2+4)/2) + 0 r = 6% for the 2 year Chapter 8 Question 4 Is it possible to construct a portfolio of real-world stocks that has a required return equal to the risk-free rate? Explain. It is not possible to construct such a portfolio in the real world. Risk free rate is an investment

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