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.

Solutions

Expert Solution

Inflation Premium for 8-year bond(IP8) = [(1.1%*4)+(3.6%*4)] / 8

= [4.4% + 14.4%]/8 = 18.8%/8 = 2.35%

8-year corporate bond yield = r* + IP8 + MRP + LP + DRP

9% = 1.4% + 2.35% + 0% + 0.7% + DRP

9% = 4.45% + DRP

DRP = 9% - 4.45% = 4.55%

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

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 1.6%. 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 (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 4% per year for each of the next three years and 3% 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 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): AAA- 0.60% AA-...

The real risk-free rate is 3.5%. Inflation is expected to be 2% this year and 3.75%...

The real risk-free rate is 3.5%. Inflation is expected to be 2% this year and 3.75% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places. % What is the yield on 3-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places. %

The real risk-free rate is 2.75%. Inflation is expected to be 1.50% this year and 4.50%...

The real risk-free rate is 2.75%. Inflation is expected to be 1.50% this year and 4.50% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places. What is the yield on 3-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places.

The real risk-free rate is 2.75%. Inflation is expected to be 2.50% this year and 5.00%...

The real risk-free rate is 2.75%. Inflation is expected to be 2.50% this year and 5.00% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places. What is the yield on 3-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places.

The real risk-free rate of interest is 3%. Inflation is expected to be 2% this year...

The real risk-free rate of interest is 3%. Inflation is expected to be 2% this year and 3% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? (If financial calculator is used show those computations and show ALL work)

The real risk-free rate is 2.00%. Inflation is expected to be 2.00% this year and 4.75%...

The real risk-free rate is 2.00%. Inflation is expected to be 2.00% this year and 4.75% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places. % What is the yield on 3-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places. %

The real risk-free rate of interest is 3.1%. Inflation is expected to be 5% this year and...

The real risk-free rate of interest is 3.1%. Inflation is expected to be 5% this year and 6% during the next 2 years. Assume that the maturity risk premiums is zero. What is the yield on 1-year treasury securities? Write your answer as a percent (do not type the % character - if your answer is 8.8% write 8.8 in the answer).

The real risk-free rate of interest is 1%, inflation is expected to be 1.5% this year,...

The real risk-free rate of interest is 1%, inflation is expected to be 1.5% this year, 2% next year, and 3% per year for the next 5 years. The maturity risk premium is a function of time to maturity = 0.2* (1-t) %. The default risk premium on a corporate bond is 0.9%; and liquidity premium is 0.5%. a. What is the IP over the next 4 years? b. Find the yield on a 4-year T-bond. c. Find the yield...

Subjects