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In: Finance
4. Calculating interest rates The real risk-free rate (r*) is 2.8% and is expected to remain...
4. Calculating interest rates
The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 6% per year for each of the next two years and 5% thereafter.
The maturity risk premium (MRP) is determined from the formula: 0.1(t – 1)%, where t is the security's maturity. The liquidity premium (LP) on all National Transmissions Corp.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP):
|
Rating |
Default Risk Premium |
|---|---|
| U.S. Treasury | — |
| AAA | 0.60% |
| AA | 0.80% |
| A | 1.05% |
| BBB | 1.45% |
National Transmissions Corp. issues fourteen-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average.
10.59%
5.45%
10.04%
9.29%
Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true?
A AAA-rated bond has less default risk than a BB-rated bond.
The yield on U.S. Treasury securities always remains static.
Solutions
jeff jeffy answered 8 months agoRelated Solutions
The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected...
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The maturity risk premium (MRP) is determined from the formula:
0.1(t – 1)%, where t is the security’s maturity. The liquidity
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following table shows the current relationship between bond ratings
and default risk premiums (DRP):
AAA- 0.60%
AA-...
The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected...
The real risk-free rate (r*) is 2.8% and is expected to remain
constant. Inflation is expected to be 7% per year for each of the
next three years and 6% thereafter.
The maturity risk premium (MRP) is determined from the formula:
0.1(t – 1)%, where t is the security’s maturity. The liquidity
premium (LP) on all Sacramone Products Co.’s bonds is 0.55%. The
following table shows the current relationship between bond ratings
and default risk premiums (DRP):
Rating
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The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 5% per year for each of the next two years and 4% thereafter.
3. Calculating interest ratesThe real risk-free rate (r*) is 2.8% and is expected to remain
constant. Inflation is expected to be 5% per year for each of the
next two years and 4% thereafter.The maturity risk premium (MRP) is determined from the formula:
0.1(t – 1)%, where t is the security’s maturity. The liquidity
premium (LP) on all Global Satellite Corp.’s bonds is 0.55%. The
following table shows the current relationship between bond ratings
and default risk premiums (DRP):RatingDefault Risk...
Problem 4-18 Determinants of Interest Rates The real risk-free rate is 4%. Inflation is expected to...
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_____%
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a. What is the IP over the next 4 years?
b. Find the yield on a 4-year T-bond.
c. Find the yield...
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