nt department of your bank is analyzing the credit risks of a local bond issuer. The bank is interested in investing in the bonds over the next two years. The following table shows the expected return on the bonds and a government bond with similar characteristics. One year rate (%) Two Year rate (%) Gov’t bond 1.50 2.25 Company bond 3.00 4.25 Spread (risk premium) 1.50 2.00
nt department of your bank is analyzing the credit risks of a local bond issuer. The bank is interested in investing in the bonds over the next two years. The following table shows the expected return on the bonds and a government bond with similar characteristics. One year rate (%) Two Year rate (%) Gov’t bond 1.50 2.25 Company bond 3.00 4.25 Spread (risk premium) 1.50 2.00
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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The investment department of your bank is analyzing the credit risks of a local bond issuer. The bank is interested in investing in the bonds over the next two years. The following table shows the expected return on the bonds and a government bond with similar characteristics.
|
|
One year rate (%) |
Two Year rate (%) |
|
Gov’t bond |
1.50 |
2.25 |
|
Company bond |
3.00 |
4.25 |
|
Spread (risk premium) |
1.50 |
2.00 |
Why is the risk premium different from the credit risks?
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