Question 1. You are considering an investment in a AAA-rated U.S. corporate bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA rated corporate bond is 3.5%. What rate of interest should the U.S. corporate pay?
Question 2. Bill and Cathy will be retiring in fifteen years and would like to buy an Italian villa. The villa costs $500,000 today, and the housing in Italy is expected to increase by 6% per year. Bill and Cathy want to make fifteen equal annual payments into an account, starting today, so there will be enough money to purchase the villa in fifteen years. If the account earns 10% per year, what is the amount of each deposit?