# Inflation and Interest Rates

### Inflation and Interest Rates

Overview

Solve three problems addressing inflation and interest rates affecting the financial environment, including the real risk-free rate, expected interest rate, detailed risk premium, and ratio analysis.

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

• Competency 1: Maximize shareholder wealth.
• Compute real risk-free rate of return based on data presented.
• Determine yield on 2-year and 3-year Treasury securities.
• Competency 2: Evaluate the financial health of the firm
• Assess the default risk of a corporate bond.

Context

There are different determinants of market interest rates. Try to answer such questions as, “What determines the shape of the yield curve?” and “How is the yield curve used to estimate future interest rates?,” which are important considerations for financial managers.

Resources

The following optional resources are provided to support you in completing the assessment or to provide a helpful context.

• Brigham, E. F., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.). Boston, MA: Cengage.

Assessment Instructions

For this assessment, complete Problems 1–3 on inflation and interest rates affecting financial environment. You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet. In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer. Note the following:

• You may need an HP 10B II business calculator.
• You may use Word or Excel, but you will find Excel to be most helpful for creating spreadsheets.
• If you choose to solve the problems algebraically, be sure to show your computations.
• If you use a financial calculator, show your input values.
• If you use an Excel spreadsheet, show your input values and formulas.