Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.50%, a maturity premium of 0.20% per year to maturity applies, i.e., MRP = 0.20% (t), where t is the number of years to maturity. Suppose also that a liquidity premium of 0.50% and a default risk premium of 2.70% applies to A - rated corporate bonds. What is the difference in the yields on a 5-year A - rated corporate bond and on a 10-year Treasury bond? Here we assume that the pure expectations theory is NOT valid, and disregard any cross - product terms, i.e., if averaging is required, use the arithmetic average. a. 4.90 p. p. b. 3.20 p.p. c. 4.11 p.p. d. 2.70 p.p. e. 2.20 p.p.
Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.50%, a maturity premium of 0.20% per year to maturity applies, i.e., MRP = 0.20% (t), where t is the number of years to maturity. Suppose also that a liquidity premium of 0.50% and a default risk premium of 2.70% applies to A - rated corporate bonds. What is the difference in the yields on a 5-year A - rated corporate bond and on a 10-year Treasury bond? Here we assume that the pure expectations theory is NOT valid, and disregard any cross - product terms, i.e., if averaging is required, use the arithmetic average. a. 4.90 p. p. b. 3.20 p.p. c. 4.11 p.p. d. 2.70 p.p. e. 2.20 p.p.
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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