Return on Financial Assets Math Problem Example | Topics and Well Written Essays - 1000 words

Return on Financial Assets - Math Problem eventtainty (low seek). In other words, invested money can earn high profits only if there is a possibility of it being lost. Likewise, a corpo range draw together has several gambles attached to it such as limit to maturity venture, degree of liquidity run a risk and its credit evaluate. Each bond is discussed below with regard to the risk attached to it. I. Bond X will earn the highest turn over because of low credit rating which federal agency that agencies regard this firm as highly risky. Moreover, it also involves maturity risk and degree of liquidity risk which is assumed as it is not stated. II. Bond W will earn a lower conk in comparison to X but higher than Y and Z, as it is rated better by the rating agency which denotes low risk in terms of business operation. However maturity and liquidity risk exists which makes investor hesitant to take it unless it offers required return for it. III. Bond Y will sacrifice more tha n Z but less than W and X because of its high credit rating, low term to maturity risk which is evident from the fact that investor will get his principal amount back before investor of bond W and X. But still it contains liquidity risk which will result in paying a higher return than bond Z. IV. Lastly, bond Z will yield the least amount of return as it does not have liquidity risk, maturity risk and neither low credit rating. Investors wont demand high return as their investment is relatively safe. 2. Explain how an economist could use the side of meat of the yield curve to analyze the probability that a recession will occur and why the spreadhead may matter. Answer Yield curve shows a relationship between yield and maturity of a debt instrument. Its slope has always been a good indicator of economic movements, as it can indicate where investor sentiments atomic number 18 heading. It indicates investors expectation of economy and interest rate. A sharply upward sloping, or stee p yield curve, has much been an indication of an economic shift. Yield curve can indicate upcoming recession when it starts to invert. It occurs when long-term yields attend below short-term yields (Besley and Brigham, 2000). Under anomalies, if investors think that economy will slow down or slouch in the future they will be satisfied with lower yield. Inverted yield curves also provoke that the market is expecting inflation to remain low. This is because, even if there is a recession, a low bond yield will still be offset by low inflation. 3. One year ago, you bought a bond for $10,000. You received interest of $400 at the end of the year, as well as your $10,000 principal. If the inflation rate over the last year was five percent, calculate the real return. Show your work. Answer Real return of a security is calculated by discounting the interest earned and principal invested to (t=0) i.e. today and accordingly conclusion percentage return of the investment. For the above gi ven question, firstly, principal amount and interest earned is added to get $10,400 and then discounted at a rate of 5%