Lennar Corporation's one-year bond has a yield equal to 6.6%. Suppose that the maturity risk premium (MRP) for all bonds with maturities greater than one year is 0.15% per year [i.e., (t-1) x 0.15%]. Based on this information, what should be the yield on Lennar's five-year bonds?

Lennar Corporation's one-year bond has a yield equal to 6.6%. Suppose that the maturity risk premium (MRP) for all bonds with maturities greater than one year is 0.15% per year [i.e., (t-1) x 0.15%]. Based on this information, what should be the yield on Lennar's five-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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Concept explainers

Bond Valuation

Bond valuation are the notes issued by the corporation to raise long-term funds for the business. The corporations are required to pay the interest on such liabilities at a specified rate of interest (termed as coupon rate) at specified dates which may be on semi-annual or annual basis. These interest payments may be in the form of coupons.

Question

Lennar Corporation's one-year bond has a yield equal to 6.6%. Suppose that the maturity risk premium
(MRP) for all bonds with maturities greater than one year is 0.15% per year [i.e., (t-1) x 0.15%] . Based on this
information, what should be the yield on Lennar's five-year bonds?
Your answer should be between 4.58 and 8.12, rounded to 2 decimal places, with no special characters.

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