risk-free rate thereafter. Rating U.S. Treasury AAA AA A BBB 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 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): 5.45% 12.04% 11.29% expected to remain constant. mation is expected to be 8% per year National Transmissions Corp. issues 14-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. O 12.59% Default Risk Premium 0.60% 0.80% 1.05% 1.45% next two years Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? The yield on an AAA-rated bond will be higher than the yield on a BB-rated bond. O Higher inflation expectations increase the nominal interest rate demanded by investors.
risk-free rate thereafter. Rating U.S. Treasury AAA AA A BBB 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 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): 5.45% 12.04% 11.29% expected to remain constant. mation is expected to be 8% per year National Transmissions Corp. issues 14-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. O 12.59% Default Risk Premium 0.60% 0.80% 1.05% 1.45% next two years Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? The yield on an AAA-rated bond will be higher than the yield on a BB-rated bond. O Higher inflation expectations increase the nominal interest rate demanded by investors.
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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Transcribed Image Text:The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next two years and 7%
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 0.55%. The following table shows the current relationship between bond ratings and default risk premiums
(DRP):
Rating
U.S. Treasury
AAA
AA
A
BBB
O 5.45%
National Transmissions Corp. issues 14-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.
O 12.04%
O 11.29%
Default Risk Premium
O 12.59%
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 an AAA-rated bond will be higher than the yield on a BB-rated bond.
O Higher inflation expectations increase the nominal interest rate demanded by investors.
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