National Co. 5-year long-term bonds currently yield 10%. The real risk free rate is 2%. The maturity risk premium is estimated to be 1%(t - 1), where t represents the number of years to maturity. The combined default risk and liquidity premiums for the company issued bonds total 2% and are constant for all bonds issued by the company regardless of the number of years until maturity. If the inflation rate is constant for the first five years and expected to be 5% for year 6, and 6% for year 7, what is the yield on a 7-year long-term bond for National Co.?
National Co. 5-year long-term bonds currently yield 10%. The real risk free rate is 2%. The maturity risk premium is estimated to be 1%(t - 1), where t represents the number of years to maturity. The combined default risk and liquidity premiums for the company issued bonds total 2% and are constant for all bonds issued by the company regardless of the number of years until maturity. If the inflation rate is constant for the first five years and expected to be 5% for year 6, and 6% for year 7, what is the yield on a 7-year long-term bond for National Co.?
Chapter13: Long-term Liabilities
Section: Chapter Questions
Problem 3EA: Krystian Inc. issued 10-year bonds with a face value of $100,000 and a stated rate of 4% when the...
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National Co. 5-year long-term bonds currently yield 10%. The real risk free rate is 2%. The maturity risk premium is estimated to be 1%(t - 1), where t represents the number of years to maturity. The combined default risk and liquidity premiums for the company issued bonds total 2% and are constant for all bonds issued by the company regardless of the number of years until maturity. If the inflation rate is constant for the first five years and expected to be 5% for year 6, and 6% for year 7, what is the yield on a 7-year long-term bond for National Co.?
(Format: XX.XX%)
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