The real rate of interest has been estimated to be 4 percent, and the expected long-term...

The real rate of interest has been estimated to be 4 percent, and the expected long-term annual inflation rate is 5 percent. Round your answers to the nearest whole number. Show work on excel please

What is the current risk-free rate of return on 1-year Treasury bonds? %

If the yield on 10-year U.S. Treasury bonds is 12 percent, what is the maturity risk premium between a 10-year bond and a 1-year bond? %

If Delta bonds, scheduled to mature in 10 years, currently sell to yield 14 percent, what is the default risk premium on these bonds? %

If investors in the common stock of Delta require a 15 percent rate of return, what is the seniority risk premium on Delta’s common stock?

Solutions

Expert Solution

What is the current risk-free rate of return on 1-year Treasury bonds? %

The current risk-free rate of return on 1-year Treasury bonds = real rate of interest + inflation rate = 4% + 5% = 9%

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If the yield on 10-year U.S. Treasury bonds is 12 percent, what is the maturity risk premium between a 10-year bond and a 1-year bond? %

Maturity risk premium = Yield of 10-year Treasury bond - yield of 1 year treasury bond = 12% - 9% = 3%

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If Delta bonds, scheduled to mature in 10 years, currently sell to yield 14 percent, what is the default risk premium on these bonds? %

Default risk premium = Yield of corporate bond of 10 year maturity - Yield on 10 year risk free government bond = 14% - 12% = 2%

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If investors in the common stock of Delta require a 15 percent rate of return, what is the seniority risk premium on Delta’s common stock?

the seniority risk premium on Delta’s common stock = Equity return - bond return = 15% - 14% = 1%

jeff jeffy answered 7 months ago

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