Given the following data, find the expected rate of inflation during the next year.r = real risk-free rate= 2.20%.Maturity risk premium on 10-year T-bonds = 2%. It is zero on 1-year bonds, and a linearrelationship exists.Default risk premium on 10-year, A-rated bonds = 1.5%.Liquidity premium = 0%.Going interest rate on 1-year T-bonds = 4.80%.3.0%2.2%2.8%2.6%O 2.4%

Variables in the question:Real risk free rate=2.20%Maturity risk premium for 1 year bond = 0%…

Given the following data, find the expected rate of inflation during the next year. r real risk-free rate 2.20%. Maturity risk premium on 10-year T-bonds 2%. It is zero on 1-year bonds, and a linear m relationship exists. 3.0% Default risk premium on 10-year, A-rated bonds 1.5%. Liquidity premium = 0%. Going interest rate on 1-year T-bonds = 4.80%. 2.2% B O2.8% O2.6% 2.4%

Given the following data, find the expected rate of inflation during the next year. r real risk-free rate 2.20%. Maturity risk premium on 10-year T-bonds 2%. It is zero on 1-year bonds, and a linear m relationship exists. 3.0% Default risk premium on 10-year, A-rated bonds 1.5%. Liquidity premium = 0%. Going interest rate on 1-year T-bonds = 4.80%. 2.2% B O2.8% O2.6% 2.4%

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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Suppose the yield on a bond that pays $100 in one year is currently 2%. If interest rates suddenly spike so that newly issued similar 1 year $100 bonds yield 4%, the price of the original bond will fall from 98.04 to 96.15.
Due to a recession, expected inflation this year is only 3.25%. However, the inflationrate in Year 2 and thereafter is expected to be constant at some level above 3.25%. Assumethat the expectations theory holds and the real risk-free rate (r*) is 2.5%. If the yield on 3-yearTreasury bonds equals the 1-year yield plus 1.5%, what inflation rate is expected after Year 1?
3
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A company's 5-year bonds are yielding 9% per year. Treasury bonds with the same maturity are yielding 5.1% per year, and the real risk-free rate (r*) is 2.35%. The average inflation premium is 2.35%, and the maturity risk premium is estimated to be 0.1 × (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.
A 5-year Treasury bond has a 4.35% yield. A 10-year Treasury bond yields 6.5%, and a 10-year corporate bond yields 9.8%. The market expects that inflation will average 2.85% over the next 10 years (IP10 = 2.85%). 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. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet What is the yield on this 5-year corporate bond? Round your answer to two decimal places. fill in the blank %
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