A corporation is planning to sell its 90-day commercial paper to investors offering an 0.08 yield....

A corporation is planning to sell its 90-day commercial paper to investors offering an 0.08 yield. If the three-month T-bill’s annualized rate is 0.03, the default risk premium is estimated to be 0.005 and there is a 0.008 tax adjustment, what is the appropriate liquidity premium? Enter the answer as a decimal using 4 decimals (e.g. 0.1234).

Solutions

Expert Solution

Given,

Yield = 0.08

T-bill's annualized rate = 0.03

Default risk premium = 0.005

Tax adjustment = 0.008

Solution :-

Appropriate liquidity premium

= Yield - T bill's annualized rate - Default risk premium - Tax adjustment

= 0.08 - 0.03 - 0.005 - 0.008 = 0.0370

jeff jeffy answered 2 years ago

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