Drongo Corporation's 3-year bonds currently yield 6.3 percent and have an inflationpremiumof 3.3%. The real risk-free rate of interest, r*, is 1.5 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 timetomaturity. The default risk and liquidity premiums for this company's bonds total 1.3 percentand are believed to be the same for all bonds issued by this company. If the average inflationrate is expected to be 3 percent for years 4, 5, and 6, what is the yield on a 6-year bond forDrongo Corporation?○ 6.05%6.45%6.25%5.85%5.65%

Real risk-free rate of interest =1.5%Inflation premium for 3 years =3.3%Inflation for next 3 years…

Answered: Drongo Corporation's 3-year bonds…

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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A BBB-rated corporate bond has a yield to maturity of 9.2%. A U.S. Treasury security has a yield to maturity of 7.4%. These yields are quoted as APRS with semiannual compounding. Both bonds pay semi-annual coupons at a rate of 7.5% and have 5 years to maturity. a. What is the price (expressed as a percentage of the face value) of the Treasury bond? b. What is the price (expressed as a percentage of the face value) of the BBB-rated corporate bond? c. What is the credit spread on the BBB bonds? a. What is the price (expressed as a percentage of the face value) of the Treasury bond? The price of the Treasury bond as a percentage of face value is 68.53 %. (Round to three decimal places.)
Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have the same maturity, a face value of $1,000, and an 8% yield to maturity. Which of the following statements is CORRECT? a) Bond A trades at a discount and Bond B trades at a discount too. b) If the yield to maturity for both bonds remains at 8%, Bond A's price one year from now will higher than it is today, but Bond B's price one year from now will be lower than it is today. c) Bond B trades at a discount, whereas Bond A trades at a premium. O d) Bond A trades at a discount, whereas Bond B trades at a premium. e) Both bonds trade at par value. f) If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value. g) Bond A trades at a premium and Bond B trades at a premium too.
Squire Inc.'s 5-year bonds yield 12.50%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Squire's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t − 1) × 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Squire's bonds?
A company's 5-year bonds are yielding 8.35% per year. Treasury bonds with the same maturity are yielding 7.15% per year, and the real risk-free rate (r*) is 2.90%. The average inflation premium is 3.85%, 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 0.9%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: (LG 2-6) Real risk-free rate=2.25% Default risk premium = 1.15% Liquidity risk premium - 0.50% = Maturity risk premium = 1.75% a. What is the inflation premium? b. What is the fair interest rate on Moore Corporation 30-year bonds?
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 2.15 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:Real risk-free rate = 0.75%Default risk premium = 2.05%Liquidity risk premium = 1.40%Maturity risk premium = 2.65% What is the inflation premium? (Round your answer to 2 decimal places.) Expected IP ______.__% What is the fair interest rate on Moore Corporation's 30-year bonds? (Round your answer to 2 decimal places.) Fair Intrest Rate _______.__%
Currently, a one-year Treasury bill is yielding 3.8 percent. Company F's three-year bond has a yield equal to 5.1 percent, and its seven-year bond has a yield equal to 5.9 percent. Although none of the bonds has a liquidity premium, any bond with a maturity equal to one year or longer has a maturity risk premium (MRP). Except for their terms to maturity, the characteristics of the bonds are the same. Compute the annual MRP associated with the bonds. Round your answer to one decimal place. % Compute the default risk premium (DRP) associated with the bonds. Round your answer to one decimal place. %
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.50 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real risk-free rate = 0.50% Default risk premium = 1.40% Liquidity risk premium = 1.00% Maturity risk premium = 2.00% a. What is the inflation premium? b. What is the fair interest rate on Moore Corporation 30-year bonds? Note: Round your percentage answers to 2 decimal places (ie., 0.1234 should be entered as 12.34). Expected inflation premium Fair interest rate
A company's 5-year bonds are yielding 8% per year. Treasury bonds with the same maturity are yielding 4.9% per year, and the real risk-free rate (r*) is 2.45%. The average inflation premium is 2.05%, 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 0.8%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places. %
In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 1.53%. a. What is the highest expected return these bonds could have? b. At the time, similar maturity Treasuries had a yield of 0.53%. Could these bonds actually have an expected return equal to your answer in part (a)? c. If you believe Ralston Purina's bonds have 0.8% chance of default per year, and that expected loss rate in the event of default is 54%, what is your estimate of the expected return for these bonds? a. What is the highest expected return these bonds could have? The highest expected return these bonds could have is%. (Round to two decimal places.)
Assume that the real, risk-free rate of interest is expected to be constant over time at 3 percent, and that the annual yield on a 6-year corporate bond is 8.00 percent, while the annual yield on a 10-year corporate bond is 7.75 percent: you may assume that the default risk and liquidity premium are the same for both bonds. Also assume that the maturity risk premium for all securities can be estimated as MRP, (0.1%) *(t-1), where t is the number of periods until maturity. Finally assume that inflation is expected to be constant at 3 percent for Years 1-6, and then constant at some rate for Years 7-10 (4 years). Given this information, determine what the market must anticipate the average annual rate of inflation will be for Years 7-10. 2.583% O 1979% 2.281% 1.375 % O 1.677 % 4
Moerdyk Corporation's bonds have a 9-year maturity, a 7.75% semiannual coupon, and a par value of $1000. The going interest rate (rd) is 6.55%, based on semiannual compounding. What is the bond's price?

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