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d. Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places. Years 1 2 3 4 A. 5 Interest Rate 10 20 30 Choose the correct graph. The correct graph is 896 796 59%. 396 Treasury yield A-corporate yield 5.32% 5.37% 5.53% 1%- 5.57% 5.52% 5.60% 6.13% 5.77% % Treasury and Corporate Yield Curves 10 Treasury bond 15 Years to Maturity 20 25 Corporate bond 30 B. Interest Rate 8% 7% 5%- 3% 2%- 0%- Treasury and Corporate Yield Curves 10 Treasury bond 15 Yours to Maturity 20 25 Corporate bond 30

d. Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places. Years 1 2 3 4 A. 5 Interest Rate 10 20 30 Choose the correct graph. The correct graph is 896 796 59%. 396 Treasury yield A-corporate yield 5.32% 5.37% 5.53% 1%- 5.57% 5.52% 5.60% 6.13% 5.77% % Treasury and Corporate Yield Curves 10 Treasury bond 15 Years to Maturity 20 25 Corporate bond 30 B. Interest Rate 8% 7% 5%- 3% 2%- 0%- Treasury and Corporate Yield Curves 10 Treasury bond 15 Yours to Maturity 20 25 Corporate bond 30

Essentials Of Investments
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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Please reference the info in part B to answer the questions in part D.  

Also, the correct graph appears to be "D".  Is this correct?

b. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, A-rated corporate bond. The current real risk-free rate is 5%, and inflation is expected to be 3% for the next 2 years, 4% for the following 4 years, and 5% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.03 (t-1) %. The liquidity premium (LP) for the corporate bond is estimated to be 0.2%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. U.S. Treasury AAA corporate AA corporate A corporate Rate 0.73% 0.83 1.17 1.61 Corporate Bond Yield Spread = DRP + LP 0.10% 0.44 0.88 What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: 7-year Corporate yield: 9.663 % 9.917✔✔ %
Transcribed Image Text:b. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, A-rated corporate bond. The current real risk-free rate is 5%, and inflation is expected to be 3% for the next 2 years, 4% for the following 4 years, and 5% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.03 (t-1) %. The liquidity premium (LP) for the corporate bond is estimated to be 0.2%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. U.S. Treasury AAA corporate AA corporate A corporate Rate 0.73% 0.83 1.17 1.61 Corporate Bond Yield Spread = DRP + LP 0.10% 0.44 0.88 What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: 7-year Corporate yield: 9.663 % 9.917✔✔ %
d. Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places. A. Years 1 2 3 Interest Rate C. 4 5 Choose the correct graph. The correct graph is Interest Rate 10 20 30 8% 7% 5%. 3%- 1%- 0%+ 8% 7% 6%- 74% 2% Treasury yield A-corporate yield 36 1%- 5.32% 5.37% 5.53% 5.57% 5.52% 5.60% 5.13% 5.77% 36 10 Treasury bond % Treasury and Corporate Yield Curves % 15 Years to Maturity 10 Treasury bond 20 Treasury and Corporate Yield Curves 15 20 Years to Maturity 25 Corporate bond Corporate bond 30 30 B. Interest Rate D. Interest Rate 8% 7% 6%- 5%. 3%- 2%. 1%+ 0%+ 8%- 7%- 2 5% 3% 2%- 1% - 0%- 5 5 Treasury and Corporate Yield Curves 15 Years to Maturity 10 Treasury bond 20 10 Treasury bond Treasury and Corporate Yield Curves 15 Years to Maturity 20 25 Corporate bond 25 Corporate bond 30 30
Transcribed Image Text:d. Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places. A. Years 1 2 3 Interest Rate C. 4 5 Choose the correct graph. The correct graph is Interest Rate 10 20 30 8% 7% 5%. 3%- 1%- 0%+ 8% 7% 6%- 74% 2% Treasury yield A-corporate yield 36 1%- 5.32% 5.37% 5.53% 5.57% 5.52% 5.60% 5.13% 5.77% 36 10 Treasury bond % Treasury and Corporate Yield Curves % 15 Years to Maturity 10 Treasury bond 20 Treasury and Corporate Yield Curves 15 20 Years to Maturity 25 Corporate bond Corporate bond 30 30 B. Interest Rate D. Interest Rate 8% 7% 6%- 5%. 3%- 2%. 1%+ 0%+ 8%- 7%- 2 5% 3% 2%- 1% - 0%- 5 5 Treasury and Corporate Yield Curves 15 Years to Maturity 10 Treasury bond 20 10 Treasury bond Treasury and Corporate Yield Curves 15 Years to Maturity 20 25 Corporate bond 25 Corporate bond 30 30
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