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

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 2 years ago

What is meant by “risk premium”? Risk premiums on corporate bonds are usually anticyclical; that is,...

What is meant by “risk premium”? Risk premiums on corporate bonds are usually anticyclical; that is, they decrease during business cycle expansions and increase during recessions. Why is this so?

Which of the following risks are not invloved with holding bonds? Inflation risk Default risk Interest...

Which of the following risks are not invloved with holding bonds? Inflation risk Default risk Interest rate risk Price risk

a higher default risk premium indicates investors expect a credit risk on the corporate bonds a.lower...

a higher default risk premium indicates investors expect a credit risk on the corporate bonds a.lower b.higher c.neutral d.not able to determine

How is the inflation premium and risk premiums determined? I understand that the liquidity risk and...

How is the inflation premium and risk premiums determined? I understand that the liquidity risk and maturity risk make up the risk premium, but how are these things determined, and who decides them?

Prompt: Bonds are long term debt offerings issued by governments and corporations. Many corporate bonds contain...

Prompt: Bonds are long term debt offerings issued by governments and corporations. Many corporate bonds contain a ‘call provision’. This feature requires the issuer to pay a price above par value when the bond is ‘called’. This is the call premium. Discuss why a bond issuer would use a call feature and then discuss the investor’s pricing of a bond with a call feature. Include a discussion of scripture as it applies to bonds as debt offerings. Requirements: 250 words...

e. Define the terms inflation premium (IP), default risk premium (DRP), liquidity premium (LP), and maturity...

e. Define the terms inflation premium (IP), default risk premium (DRP), liquidity premium (LP), and maturity risk premium (MRP). Which of these premiums is included when determining the interest rate on (1) short-term U.S. Treasury securities, (2) long-term U.S. Treasury securities, (3) short-term corporate securities, and (4) long-term corporate securities? Explain how the premiums would vary over time and among the different securities.

Based on this information, what is your estimate of the corporate bond's default risk premium?

2. Bond ratings Rating agencies-such as Standard & Poor's (S&P), Moody's Investor Service, and Fitch Ratings-assign credit ratings to bonds based on both quantitative and qualitative factors. These ratings are considered indicators of the issuer's default risk, which impacts the bond's interest rate and the issuer's cost of debt capital. Based on these ratings, bonds are classified into investment-grade bonds and junk bonds. Which of the following bonds is likely to be classified as a junk bond? A bond with a BBB...

Long term gov’t bonds are returning 4%. The equity risk premium is 5%. If XYZ stock...

Long term gov’t bonds are returning 4%. The equity risk premium is 5%. If XYZ stock has a beta of 0.6, what is its expected return? Assume 20% of a portfolio in ABC, 60% in DEF, and 20% in GHI. ABC returned 10%, DEF returned 5%, and GHI returned 7%. What was the portfolio's return? We have $25 thousand invested in ABC stock, $50 thousand in DEF stock, and $15 thousand in GHI stock. What percentage of the portfolio is...

What are default risk premiums, and what do they measure?

You have determined the following data for a given bond: Real risk-free rate (r*) = 3%; inflation premium = 8%; default risk premium = 2%; liquidity premium = 2%; and maturity risk premium = 1%.

You have determined the following data for a given bond: Real risk-free rate (r*) = 3%; inflation premium = 8%; default risk premium = 2%; liquidity premium = 2%; and maturity risk premium = 1%.What is the interest rate on short-term Treasury securities, or T-bills, of the relevant maturity?What is the interest rate on long-term corporate bonds, of the relevant maturity?

Question