A company's 5-year bonds are yielding 7.85% per year. Treasury bonds with the same maturity are...

A company's 5-year bonds are yielding 7.85% per year. Treasury bonds with the same maturity are yielding 5.9% per year, and the real risk-free rate (r*) is 2.45%. The average inflation premium is 3.05%, and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = number of years to maturity. If the liquidity premium is 1.05%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.

Expert Solution

For corporate security,

Based on the formula above,

Nominal yield on Corporate Bond = Nominal Yield on Treasury Bond + Liquidity Premium + Default risk premium

7.85% = 5.9% + 1.05% + Default risk premium

Default risk premium = 0.90%

jeff jeffy answered 2 years ago

A company's 5-year bonds are yielding 9% per year. Treasury bonds with the same maturity are...

A company's 5-year bonds are yielding 9% per year. Treasury bonds with the same maturity are yielding 4.7% per year, and the real risk-free rate (r*) is 2.85%. The average inflation premium is 1.45%, and the maturity risk premium is estimated to be 0.1 × (t - 1)%, where t = number of years to maturity. If the liquidity premium is 0.9%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.

5-year Treasury bonds yield 5.2%. The inflation premium (IP) is 1.9%, and the maturity risk premium...

5-year Treasury bonds yield 5.2%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

5-year Treasury bonds yield 5.9%. The inflation premium (IP) is 1.9%, and the maturity risk premium...

5-year Treasury bonds yield 5.9%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*? Select the correct answer. a. 2.90% b. 3.25% c. 2.55% d. 3.60%

An investor is considering the purchase of zero-coupon U.S. Treasury bonds. A 30-year zero-coupon bond yielding...

An investor is considering the purchase of zero-coupon U.S. Treasury bonds. A 30-year zero-coupon bond yielding 8% can be purchased today for $9.94. At the end of 30 years, the owner of the bond will receive $100. The yield of the bond is related to its price by the following equation: Here, P is the price of the bond, y is the yield of the bond, and t is the maturity of the bond measured in years. Evaluating this equation...

Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a duration of 12.45, yielding...

Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a duration of 12.45, yielding 11.9 percent if the futures has a price of $90,000, a duration of 8.5 years and an implied yield of 9.5 percent. a. 16.27 b. 16.63 c. 7.42 d. 11.11 e. none of the above which of the following is the interpretation of a VAR of $5 million for one year at .05. a. the probability is .05 that the firm will lose at...

5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

1. 5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?2. If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

U.S. Treasury 30 year maturity, zero coupon bonds are currently selling in the marketplace with a...

U.S. Treasury 30 year maturity, zero coupon bonds are currently selling in the marketplace with a yield to maturity of 7.00%. Even though the bonds have a coupon rate of 0.00%, please assume semi–annual compounding, which is the bond market convention? If inflation increased unexpectedly, forcing the nominal required rate of return on these Treasury bonds to increase by 1.50% to 8.50%, by what dollar amount would the current market price of these bonds decrease? Enter your answer rounded to...

The premium paid on Treasury bonds due to additional maturity was _______.

Use the information provided to answer the following question.Security YieldExpected change in the CPI 2.50%30-day T-bill 3.50%10-year T-bond 5.50%10-year AAA corporate bond 7.40%5-year BB corporate bond 8.10%10-year BB corporate bond 8.40%15 year BB corporate bond 8.60%10-year B corporate bond 9.40%30-year BBB corporate bond 9.10%corporate stocks (S & P 500) 13.50%The premium paid on Treasury bonds due to additional maturity was _______.Group of answer choices0.9%1.0%2.0%3.0%

The current price of a 10-year U.S. Treasury Bond with 5 years to maturity and a...

The current price of a 10-year U.S. Treasury Bond with 5 years to maturity and a 4% coupon is $1,180. Assuming the usual maturity value of $1,000 and semi-annual coupon payments, what is the Yield to Maturity (YTM) for this bond

The following table summarizes the yields to maturity on several three-year bonds: Security Yield (%) Treasury...

The following table summarizes the yields to maturity on several three-year bonds: Security Yield (%) Treasury 2.15 AAA corporate 3.25 BBB corporate 4.25 B corporate 5.69 What is the credit default spread on B-rated corporate bonds? 1.0% 1.10% 2.15% 3.54% 5.69%

Question