Long term corporate bonds would contain which of the following risk premiums. Inflation Premium Default Risk...

Long term corporate bonds would contain which of the following risk premiums.

Inflation Premium

Default Risk Premium

Liquidity Premium

Maturity Risk Premium

All of the above

Solutions

Expert Solution

Answer - All of the above

Nominal yield of a bond = Real risk free rate + Inflation Premium + Default Risk Premium + Liquidity Premium + Maturity Risk Premium

Real risk free rate is the inflation adjusted risk free rate of return.

Inflation premium compensates for the inflation risk that the investor takes.

Default risk premium compensates for credit default risk taken by investor.

Liquidity premium compensates for the lack of marketability of the bond.

Maturity risk premium compensates for long term interest rate risk bear by the bond holder.

jeff jeffy answered 1 year ago

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