**Determinants of Interest Rate for Individual Securities***The Wall Street Journal* reports that the current rate on 10-year Treasury bonds is 6.85 percent, on 20-year Treasury bonds is 7.35 percent, and on a 20-year corporate bond is 8.70 percent. Assume that the maturity risk premium is zero. If the default risk premium and liquidity risk premium on a 10-year corporate bond is the same as that on the 20-year corporate bond, what is the current rate on a 10-year corporate bond?

Given, 10-year Treasury bond rate = 6.85% 20-year Treasury bond rate = 7.35% 20-year Corporate bond…

Answered: Determinants of Interest Rate for…

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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If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 11.9%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond? 6.41% 5.35% 4.40% 5.46% 5.30%
Determinants of Interest Rate for Individual Securities A particular security's default risk premium is 3.90 percent. For all securities, the inflation risk premium is 2.65 percent and the real interest rate is 3.20 percent. The security's liquidity risk premium is .90 percent and maturity risk premium is 1.15 percent. The security has no special covenants. What is the security's equilibrium rate of return?
Identify the types of bond being referred to in the following case: A P5,000,000-face value bond. It requires annual principal payment of P500,000 for ten years. It is secured with the issuing entity’s equipment.a. Straight; Fixed-rated; Junkb. Straight; Zero-coupon; Collateral Trustc. Serial; Fixed-rated; Junkd. Serial; Zero-coupon; Equipment Trust
If a company's bonds are selling at a discount, then Select one: a. The current interest rates are below the coupon rate b. The YTM is below the coupon interest rate c. The coupon interest rate is equal to the going interest rate d. The going rate of interest is above the coupon rate
The table below shows current and expected future one-year interest rates, as well as current interest rates on multiyear bonds. Use the table to calculate the liquidity premium for each multiyear bond. Year One-Year Bond Rate Multlyear Bond Rate 1 2.00% 2.00% 2 5.00% 5.00% 6.00% 7.00% 7.00% 9.00% 9.00% 11.00% The liquidity premiums for each year are given as: (Enter your responses rounded to two decimal places) 111 = 121= ly= 141. = 151 135 %
Rank from highest credit risk to lowest risk the following bonds, with the same time to maturity, by their yield to maturity: (Rank: 1 = highest, 4 = lowest) Treasury bond with yield of 5.45 percent IBM bond with yield of 7.59 percent Trump Casino bond with yield of 8.86 percent Banc One bond with a yield of 6.09 percent
The 12-year $1 comma 000 par bonds of Vail Inc. pay 13 percent interest. The market's required yield to maturity on a comparable - risk bond is 16 percent. The current market price for the bond is $910. a. Determine the yield to maturity. b. What is the value of the bonds to you given the yield to maturity on a comparable - risk bond? c. Should you purchase the bond at the current market price?
Which of the following statements is right? Group of answer choices a)Ignoring the liquidity risk, the 10-treasry bond should have the same interest rate as the 10-year corporate bond. b)Ignoring the default risk, the 10-treasry bond should have the same interest rate as the 10-year corporate bond. c)The return of the 10-year treasury bond must be less than that of the 10-year corporate bond d)The return of the 10-year treasury bond must be greater than that of the 10-year corporate bond
The Wall Street Journal reports that the current rate on 8-year Treasury bonds is 5.85 percent, the rate on a 15-year Treasury bond is 6.25 percent, and the rate on a 15-year corporate bond issued by MHM Corp. is 7.35 percent. Assume that the maturity risk premium is zero. If the default risk premium and the liquidity risk premium on the 8-year corporate bond issued by MHM Corp. are the same as those on the 15-year corporate bond, calculate the current rate on MHM Corp.'s 8-year corporate bond.
which of the following bonds would you expect to have the highest yield? 1. 10-year US treasury bond 2. 1-year US treasury bond 3. 10-year corporate bond 4. 5-year municipal bond 5. 5-year US treasury bond
A corporate bond matures in five years. This bond’s credit spread over comparable maturity Treasury Bonds is 3.25%. Treasury bond yields are currently 2.125%, 4.375%, and 6.250% for 2-year, 5-year, 10-year maturity bonds, respectively. What is the cost of debt for the firm which issued the bond?
If 10-year Treasury bonds have a yield of 4.3%, 10-year corporate bonds yield 6.7%, the maturity risk premium on all 10-year bonds is same, and corporate bonds have a 0.3% liquidity premium vs. a zero liquidity premium for T-bonds,what is the default risk premium on the corporate bond?

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