Inflation rate

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Part 1: Assuming that the pure rate of interest is 2%, and investors require an inflation premium of 3.5% and a risk premium of 6% to invest in a certain security, calculate the following rates using the multiplicative form of the Fisher model:

The nominal rate of interest on the securityThe real rate of interest on the securityThe risk-free rate of interest on securities of this maturity(Please carry your final answers out to 2 decimal places.)

Part 2: An Inyo County California municipal bond is currently yielding 4.2%. What after-tax yield would you receive if you are in the following circumstances:

You are in a 28% federal tax bracket, and, as a California resident, you are in the 5% state tax bracket.You are in a 33% federal tax bracket, and, as a Utah resident, you pay a 4% state income tax.You are in a 15% federal tax bracket, and, as a Nevada resident, you pay no state income tax because Nevada has no income tax.(Please carry your final answers out to 2 decimal places.)

Part 3: The expected return on a share of ExxonMobil stock in the U.S. is 15.6% while the expected return on a share of Royal Dutch Shell stock is 12.6% in the Netherlands. If the pure rate of return is 2% in both countries and the required risk premium is 6% for each company’s stock, what is the long-term expected inflation rate in each country if the multiplicative form of the Fisher model is used in making the calculations?

Sample Solution
The post Inflation rate

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