Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. Corporate Bond Yield Rate Spread = DRP + LP U.S. Treasury 0.73 % — AAA corporate 0.93 0.20 % AA corporate 1.33 0.60 A corporate 1.75 1.02 What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: 6.553%----->correct 7-year Corporate yield: ? % Maturity Yield 1 year 5.37 % 2 years 5.42 3 years 5.58 4 years 5.64 5 years 5.56 10 years 5.68 20 years 6.19 30 years 5.85 Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places. Years Treasury yield AA-corporate yield 1 5.37 % ? % 2 5.42 % ? % 3 5.58 % ? % 4 5.64 % ?% 5 5.56 % ?% 10 5.68 % ? % 20 6.19 % ? % 30 5.85 % ? % Please help me figure out question marks in spaces :)
Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. Corporate Bond Yield Rate Spread = DRP + LP U.S. Treasury 0.73 % — AAA corporate 0.93 0.20 % AA corporate 1.33 0.60 A corporate 1.75 1.02 What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: 6.553%----->correct 7-year Corporate yield: ? % Maturity Yield 1 year 5.37 % 2 years 5.42 3 years 5.58 4 years 5.64 5 years 5.56 10 years 5.68 20 years 6.19 30 years 5.85 Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places. Years Treasury yield AA-corporate yield 1 5.37 % ? % 2 5.42 % ? % 3 5.58 % ? % 4 5.64 % ?% 5 5.56 % ?% 10 5.68 % ? % 20 6.19 % ? % 30 5.85 % ? % Please help me figure out question marks in spaces :)
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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Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP.
| Corporate Bond Yield | ||||
| Rate | Spread = DRP + LP | |||
| U.S. Treasury | 0.73 | % | — | |
| AAA corporate | 0.93 | 0.20 | % | |
| AA corporate | 1.33 | 0.60 | ||
| A corporate | 1.75 | 1.02 |
What yield would you predict for each of these two investments? Round your answers to three decimal places.
12-year Treasury yield: 6.553%----->correct
7-year Corporate yield: ? %
| Maturity | Yield | |
| 1 year | 5.37 | % |
| 2 years | 5.42 | |
| 3 years | 5.58 | |
| 4 years | 5.64 | |
| 5 years | 5.56 | |
| 10 years | 5.68 | |
| 20 years | 6.19 | |
| 30 years | 5.85 |
Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places.
| Years | Treasury yield | AA-corporate yield | ||
| 1 | 5.37 | % | ? % | |
| 2 | 5.42 | % | ? % | |
| 3 | 5.58 | % | ? % | |
| 4 | 5.64 | % | ?% | |
| 5 | 5.56 | % | ?% | |
| 10 | 5.68 | % | ? % | |
| 20 | 6.19 | % | ? % | |
| 30 | 5.85 | % | ? % |
Please help me figure out question marks in spaces :)
Transcribed Image Text:b. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free
rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by
this formula: MRP = 0.02(t-1) %. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium
(DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at
the bond's DRP.
U.S. Treasury
AAA corporate
AA corporate
A corporate
Rate
0.73%
0.93
1.33
1.75
Maturity
1 year
2 years
3 years
4 years
5 years
10 years
Corporate Bond Yield
Spread = DRP + LP
What yield would you predict for each of these two investments? Round your answers to three decimal places.
12-year Treasury yield:
7-year Corporate yield:
c. Given the following Treasury bond yield information, construct a graph of the yield curve.
Yield
5.37%
5.42
5.58
5.64
5.56
5.68
10.533 %
0.20%
0.60
1.02
9.597 %
Transcribed Image Text:d. Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury
and the corporate bonds. Round your answers to two decimal places.
Years
A.
1
2
3
4
5
t Rate
10
20
30
Choose the correct graph.
The correct graph is
8%
7%
6%
Treasury yield
5%-
5.37%
5.42%
5.58%
5.64%
5.56%
5.68%
6.19%
5.85%
AA-corporate
yield
%
%
%
%
%
%
%
%
Treasury and Corporate Yield Curves
B.
8%-
t Rate
7%
6%-
e 5%
Treasury and Corporate Yield Curves
Expert Solution
Step 1
We have to deduce the treasury rates and AA corporate rates for different maturities and plot the graphs.
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