In: Finance
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).
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