1. You want to borrow $60,000 from your local bank. You can afford to make monthly payments of $1,200, but no more. Assuming monthly compounding, what is the highest APR you can afford on a 60-month loan?
2. Suppose you expect the rate of inflation to be 4% next year, then fall to 3% for the following year, and then to fall to 2% for each of the following years. Suppose r* is to remain constant at 2% and the maturity risk premium is 0 for the 1st year, .10% for the 2nd year, and will increase by .10% for each following year, up to a limit of 1.0%. Calculate the interest rate (r) on the following term bonds:
a. 1 year
b. 5 year
c. 10 year
d. 15 year
e. 20 year