Problem
I. Suppose that you buy a TIPS (inflation-indexed) bond with a 2-year maturity and a (real)coupon of 4% paid annually. If you buy the bond at its face value of $1,000, and the inflation rate is 8% in the first year and 3% in the second year. What will be your total cash flow at the end of year 2? (Hint: Total cash flow = coupon + face value in nominal terms).
II. An investment costing $25 returns $27.50 at the end of one year with no risk. Given this. what is the IRR?
III. In a year in which corporate bonds offered an average return of 10%, common stocks offered an average return of 17% and Treasury bills offered 2%. The market risk premium was:
IV. A stock has a beta of 1.5 and an expected return of 16.35%. What is the risk-free rate if the market rate of return is 12.5%?