An analyst made the following assessments: Inflation is expected to be 1% this year, 2% next year, 3%, 4%, 5% on the next succeeding years, and then for the next succeeding years it will be constant throughout at a rate of 7%. The real risk-free rate is expected to remain at 4% for the next 15 years. The maturity risk premium is 0.1%(t), where t = the maturity of the bond in years. A 10-year corporate bond currently yields 15%. Assume that the above assessments are true, what will be the yield on the bond, one year from now assuming that the bond's default and liquidity premium is the same? (In percentage, put percentage sign)

An analyst made the following assessments: Inflation is expected to be 1% this year, 2% next year, 3%, 4%, 5% on the next succeeding years, and then for the next succeeding years it will be constant throughout at a rate of 7%. The real risk-free rate is expected to remain at 4% for the next 15 years. The maturity risk premium is 0.1%(t), where t = the maturity of the bond in years. A 10-year corporate bond currently yields 15%. Assume that the above assessments are true, what will be the yield on the bond, one year from now assuming that the bond's default and liquidity premium is the same? (In percentage, put percentage sign)

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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The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.10 percent, and the 6-year Treasury rate is 7.35 percent. From discussions with your broker, you have determined that expected inflation premium is 2.60 percent next year, 2.85 percent in Year 2, and 3.05 percent in Year 3 and beyond. Further, you expect that real interest rates will be 3.55 percent annually for the foreseeable future. What is the maturity risk premium on the 6-year Treasury security?
Assume the current Treasury yield curve shows that the spot rates for six months, one year, and one and a half years are 1.0%, 1.1%, and 1.3%, all quoted as semiannually compounded APRs. What is the price of a $1,000 par, 4.75% coupon bond maturing in one and a half years (the next coupon is exactly six months from now)? The price of this bond is $ (Round to the nearest cent.)
The real risk-free rate is 2%, and inflation is expected to be 2% for the next 2 years. A 2-year Treasury security yields 5.0%. What is the maturity risk premium for the 2-year security? Round your answer to one decimal place.
The real risk-free rate is 3.25%. Inflation is expected to be 1.75% this year and 5.00% during the next 2 years. Assume that the maturity nsk premium is zero. What is the yield on 2-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places. 7.5 % What is the yield on 3-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places. ,06 %
Assume the current Treasury yield curve shows that the spot rates for six months, one year, and one and a half years are 1.0%, 1.1%, and 1.3%, all quoted as semiannually compounded APRs. What is the price of a $1,000 par, 4.25% coupon bond maturing in one and a half years (the next coupon is exactly six months from now)? The price of this bond is $ (Round to the nearest cent.)
The real risk-free rate is 4%, and inflation is expected to be 5% for the next 2 years. A 2-year Treasury security yields 9.5%. What is the maturity risk premium for the 2-year security?
Suppose the inflation rate is expected to be 6.75% next year, 4.3% the following year, and 2.3% thereafter. Assume that the real risk-free rate, r*, will remain at 1.85% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds. Calculate the interest rate on 3-year Treasury securities.
The real risk-free rate, r*, is 1.4%. Inflation is expected to average 1.2% a year for the next 4 years, after which time inflation is expected to average 4.3% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 10.7%, which includes a liquidity premium of 0.7%. What is its default risk premium? Do not round intermediate calculations. Round your answer to two decimal places.
The real risk-free rate, r*, is 1.7%. Inflation is expected to average 1.4% a year for the next 4 years, after which time inflation is expected to average 4.4% a year. Assume that there is no maturity risk premium. A 9-year corporate bond has a yield of 11.0%, which includes a liquidity premium of 0.2%. What is its default risk premium? Do not round intermediate calculations. Round your answer to two decimal places. 3.2 % Hide Feedback
The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 4% per year for each of the next two years and 3% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t – 1)%, where t is the security’s maturity. The liquidity premium (LP) on all Global Satellite Corp.’s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium U.S. Treasury — AAA 0.60% AA 0.80% A 1.05% BBB 1.45% Global Satellite Corp. issues 15-year, AA-rated bonds. What is the yield on one of these bonds?
The real risk-free rate is 3%, and inflation is expected to be 4% for the next 2 years. A 2-year Treasury security yields 7.6%. What is the maturity risk premium for the 2-year security? Round your answer to one decimal place.
An investor in Treasury securities expects inflation to be 2.1% in Year 1, 3.0% in Year 2, and 4.25% each year thereafter. Assume that the real risk-free rate is 2.25% and that this rate will remain constant. Three-year Treasury securities yield 5.20%, while 5-year Treasury securities yield 6.00%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is MRP5 - MRP3? Do not round intermediate calculations. Round your answer to two decimal places.

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