securities that mature in 6 years currently have an interest rate of 8.5%. Inflation is expected to be 5% each of th next three years and 6% each year after the third year. The maturity risk premium is estimated to be 0.1%(t-1), where t is equal to the maturity of the bond (i.e., the maturity risk premium of a one-year bond is zero). The real risk-free rate is assumed to be constant over time. What is the real risk-free rate of interest?
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Treasury securities that mature in 6 years currently have an interest rate of 8.5%. Inflation is expected to be 5% each of th next three years and 6% each year after the third year. The maturity risk premium is estimated to be 0.1%(t-1), where t is equal to the maturity of the bond (i.e., the maturity risk premium of a one-year bond is zero). The real risk-free rate is assumed to be constant over time. What is the real risk-free rate of interest?
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