A4-1 P = $400,000+$300,000+$100,000+$10,000=$725,122.13 1.071 1.072 1.073 1.074 P4-12. Bennifer Jewelers recently issued 10-year bonds that make annual interest payments of $50. Suppose you purchased one of these …show more content…
Suppose also that the current Treasury bill yield is 1.5%, but the historical average return on Treasury bills is 4.1%. Estimate the expected return on stocks and explain how and why you arrived at your answer.
T-bills are expected to return 1/5%+7.6%=9.1%
T-bills yeilds are expected to return 4/1%+7.6%=11.7%
The current expectation is 9.1% and over the long haul, one can expect 11.7% return. b. Suppose that, over the long run, the risk-premium on stocks relative to Treasury bonds has been 6.5%. The current Treasury bond yield is 4.5%, but the historical return on T-bonds is 5.2%. Estimate the expected return on stocks and explain how and why you arrived at your answer.
Based on T-bills, expected returns are 4.5%+6.5%=11%.
Historical returns, expected returns are 5.2%+6.5%=11.7% c. Compare your answers above and explain any differences.
Bond yields appear to provide better long run stock returns. T-bills rates may have more variables but may stray from the long