4-year Drongo Corporation's bonds currently yield 7.2 percent and have an inflation premium of 3.6%. The real risk-free rate of interest, r*, is 2.6 percent and is assumed to be constant. The maturity risk premium (MRP) is estimated to be 0.1% (t - 1), where t is equal to the time to maturity. The default risk and liquidity premiums for this company's bonds total 0.7 percent and are believed to be the same for all bonds issued by this company. If the average inflation rate is expected to be 2.2 percent for years 5, 6, and 7, what is the yield on a 7-year bond for Drongo Corporation? A. 6.90% B. 7.40% C. 6.40% D. 5.90% E. 5.40%
4-year Drongo Corporation's bonds currently yield 7.2 percent and have an inflation premium of 3.6%. The real risk-free rate of interest, r*, is 2.6 percent and is assumed to be constant. The maturity risk premium (MRP) is estimated to be 0.1% (t - 1), where t is equal to the time to maturity. The default risk and liquidity premiums for this company's bonds total 0.7 percent and are believed to be the same for all bonds issued by this company. If the average inflation rate is expected to be 2.2 percent for years 5, 6, and 7, what is the yield on a 7-year bond for Drongo Corporation? A. 6.90% B. 7.40% C. 6.40% D. 5.90% E. 5.40%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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12.
Transcribed Image Text:4-year
Drongo Corporation's
bonds currently yield 7.2 percent
and have an inflation premium of
3.6%. The real risk-free rate of
interest, r*, is 2.6 percent and is
assumed to be constant. The
maturity risk premium (MRP) is
estimated to be 0.1%(t - 1), where
t is equal to the time to maturity.
The default risk and liquidity
premiums for this company's
bonds total 0.7 percent and are
believed to be the same for all
bonds issued by this company. If
the average inflation rate is
expected to be 2.2 percent for
years 5, 6, and 7, what is the yield
on a 7-year bond for Drongo
Corporation?
A. 6.90%
B. 7.40%
C. 6.40%
D. 5.90%
E. 5.40%
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