7. Problem 6.11 (Default Risk Premium) K eBook A company's 5-year bonds are yielding 10% per year. Treasury bonds with the same maturity are yielding 4.5% per year, and the real risk-free rate (r) is 2.25%. The average inflation premium is 1.85%, and the maturity risk premium is estin (t-1) %, where t number of years to maturity. If the liquidity premium is 1.2%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
7. Problem 6.11 (Default Risk Premium) K eBook A company's 5-year bonds are yielding 10% per year. Treasury bonds with the same maturity are yielding 4.5% per year, and the real risk-free rate (r) is 2.25%. The average inflation premium is 1.85%, and the maturity risk premium is estin (t-1) %, where t number of years to maturity. If the liquidity premium is 1.2%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
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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Transcribed Image Text:7. Problem 6.11 (Default Risk Premium)
BA
eBook
A company's 5-year bonds are yielding 10% per year. Treasury bonds with the same maturity are yielding 4.5% per year, and the real risk-free rate (r*) is 2.25%. The average inflation premium is 1.85%, and the maturity risk premium is estimated to be 0.1 x
(t-1)%, where t = number of years to maturity. If the liquidity premium is 1.2%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
%
Transcribed Image Text:8. Problem 6.17 (Interest Rate Premiums)
BO
eBook
A 5-year Treasury bond has a 4.2% yield. A 10-year Treasury bond yields 6.7%, and a 10-year corporate bond yields 8.1%. The market expects that inflation will average 2.8% over the next 10 years (IP10 = 2.8%). Assume that there is no maturity risk
premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP = LP = 0.) A 5-year corporate bond has
the same default risk premium and liquidity premium as the 10-year corporate bond described. What is the yield on this 5-year corporate bond? Round your answer to one decimal place.
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