National Transmissions Corp. issues 7-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. 5.25% 9.49% 10.54% 9.94%
National Transmissions Corp. issues 7-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. 5.25% 9.49% 10.54% 9.94%
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
Related questions
Question
![The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 6% per year for each of the next two years and 5%
thereafter.
The maturity risk premium (MRP) is determined from the formula: 0.1(t-1) %, where t is the security's maturity. The liquidity premium (LP) on all
National Transmissions Corp.'s bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums
(DRP):
Rating
U.S. Treasury
AAA
AA
A
BBB
O 5.25%
O9.49%
National Transmissions Corp. issues 7-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if
averaging is required, use the arithmetic average.
10.54%
Default Risk Premium
9.94%
0.60%
0.80%
1.05%
1.45%
Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true?
O The yield on U.S. Treasury securities always remains static.
O In theory, the yield on a bond with a longer maturity will be higher than the yield on a bond with a shorter maturity.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1ec38cd9-86db-4ebd-913a-c600875d46df%2F9d334b2e-ce76-4963-be92-1777d3f61138%2F46jgqja_processed.png&w=3840&q=75)
Transcribed Image Text:The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 6% per year for each of the next two years and 5%
thereafter.
The maturity risk premium (MRP) is determined from the formula: 0.1(t-1) %, where t is the security's maturity. The liquidity premium (LP) on all
National Transmissions Corp.'s bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums
(DRP):
Rating
U.S. Treasury
AAA
AA
A
BBB
O 5.25%
O9.49%
National Transmissions Corp. issues 7-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if
averaging is required, use the arithmetic average.
10.54%
Default Risk Premium
9.94%
0.60%
0.80%
1.05%
1.45%
Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true?
O The yield on U.S. Treasury securities always remains static.
O In theory, the yield on a bond with a longer maturity will be higher than the yield on a bond with a shorter maturity.
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