Question
In: Finance
Suppose the real risk-free rate is 3.25%, the average future inflation rate is 4.35%, and a...
Suppose the real risk-free rate is 3.25%, the average future inflation rate is 4.35%, and a maturity risk premium of 0.07% per year to maturity applies to both corporate and T-bonds, i.e., MRP = 0.07%(t), where t is the number of years to maturity. Suppose also that a liquidity premium of 0.50% and a default risk premium of 0.90% apply to A-rated corporate bonds but not to T-bonds. How much higher would the rate of return be on a 10-year A-rated corporate bond than on a 5-year Treasury bond? Here we assume that the pure expectations theory is NOT valid. Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.
| a. |
1.84% |
|
| b. |
2.13% |
|
| c. |
1.75% |
|
| d. |
1.93% |
|
| e. |
2.03% |
Solutions
jeff jeffy answered 2 years agoRelated Solutions
Suppose the real risk-free rate is 2.3%, the average future inflation rate is 2.1%, and a...
Suppose the real risk-free rate is 2.3%, the average future
inflation rate is
2.1%, and a maturity premium of 0.05% per year to maturity
applies, i.e., MRP =
0.05%(t), where t is the years to maturity. What rate of return
would you
expect on a 5-year Treasury security, assuming the pure
expectations theory is
NOT valid?
Group of answer choices
4.65%
4.30%
5.35%
5.00%
5.70%
Your portfolio consists of $31,232 invested in a stock that has
a beta = 1.9,...
A. The real risk-free rate is 2.0% and inflation is expected to be 3.25% for the...
A. The real risk-free rate is 2.0% and inflation is expected to
be 3.25% for the next 2 years. A 2-year Treasury security yields
6.05%. What is the maturity risk premium for the 2-year security?
Round your answer to one decimal place.
%
B. An analyst is evaluating securities in a developing nation
where the inflation rate is very high. As a result, the analyst has
been warned not to ignore the cross-product between the real rate
and inflation. A...
Suppose the real risk-free rate is 3.00%, the average expectedfuture inflation rate is 5.90%, and...
Suppose the real risk-free rate is 3.00%, the average expected
future inflation rate is 5.90%, and a maturity risk premium of
0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t
is the number of years to maturity. What rate of return would you
expect on a 1-year Treasury security, assuming the pure
expectations theory is NOT valid? Disregard cross-product terms,
i.e., if averaging is required, use the arithmetic average.
The real risk-free rate, r*, is 3.1%. Inflation is expected to average 2.95% a year for...
The real risk-free rate, r*, is 3.1%. Inflation is expected to
average 2.95% a year for the next 4 years, after which time
inflation is expected to average 3.5% a year. Assume that there is
no maturity risk premium. An 11-year corporate bond has a yield of
11.65%, which includes a liquidity premium of 0.9%. What is its
default risk premium? Do not round intermediate calculations. Round
your answer to two decimal places.
The real risk-free rate, r*, is 1.4%. Inflation is expected to average 1.1% a year for...
The real risk-free rate, r*, is 1.4%. Inflation is expected to
average 1.1% a year for the next 4 years, after which time
inflation is expected to average 3.6% a year. Assume that there is
no maturity risk premium. An 8-year corporate bond has a yield of
9.0%, which includes a liquidity premium of 0.7%. What is its
default risk premium? Do not round intermediate calculations. Round
your answer to two decimal places.
%
The real risk-free rate, r*, is 1.6%. Inflation is expected to average 1.3% a year for...
The real risk-free rate, r*, is 1.6%. Inflation is expected to
average 1.3% a year for the next 4 years, after which time
inflation is expected to average 4.2% a year. Assume that there is
no maturity risk premium. A 10-year corporate bond has a yield of
8.4%, which includes a liquidity premium of 0.3%.
What is its default risk premium? Do not round intermediate
calculations. Round your answer to two decimal places.
The real risk-free rate is 3%, and inflation is expected to be 2% for the next...
The real risk-free rate is 3%, and inflation is expected to be
2% for the next 2 years. A 2-year Treasury security yields 6.1%.
What is the maturity risk premium for the 2-year security? Round
your answer to one decimal place.
%
The real risk-free rate is 3.00%, and inflation is expected to be 3.50% for the next...
The real risk-free rate is 3.00%, and inflation is expected to
be 3.50% for the next 2 years. A 2-year Treasury security yields
8.50%. What is the maturity risk premium for the 2-year security?
Round your answer to two decimal places.
%
The real risk-free rate is 2.5% and inflation is expected to be 2.25% for the next...
The real risk-free rate is 2.5% and inflation is expected to be
2.25% for the next 2 years. A 2-year Treasury security yields
4.95%.
What is the maturity risk premium for the 2-year security? Round
your answer to one decimal place.
%
The real risk-free rate is 3.5% and inflation is expected to be 2.25% for the next...
The real risk-free rate is 3.5% and inflation is expected to be
2.25% for the next 2 years. A 2-year Treasury security yields
6.95%.
What is the maturity risk premium for the 2-year security? Round
your answer to one decimal place.
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- A conductive sphere with radius ? = 1 ? has been increased to the potential ?0...
- Define a char variable. Read a char value from the keyboard into the variable. Print the...
- If you wanted to store a birthday within code, what class would you use in Java?...
- Explain what is meant by the Theme Park internal and external business environment and use the...
- Description Write a program that prints out your name, the course ID of this class, what...
- A project has an initial cost of $65,475, expected net cash inflows of $12,000 per year...
- Make a program that lets the user enter a positive or negative integer as many times...
ADVERTISEMENT