The 10-year bonds of Gator Corporation are yielding 8 percent per year. Treasury bonds with the same maturity are yielding 6.4 percent per year. The real risk-free rate (k*) has not changed in recent years and is 3 percent. The average inflation premium is 2.5 percent and the maturity ris premium takes the form: MRP = 0.1%(t - 1), where t = number of years to maturity. If the liquidity premium is 0.5 percent, what is the default risk premium on the corporate bond?

The 10-year bonds of Gator Corporation are yielding 8 percent per year. Treasury bonds with the same maturity are yielding 6.4 percent per year. The real risk-free rate (k*) has not changed in recent years and is 3 percent. The average inflation premium is 2.5 percent and the maturity ris premium takes the form: MRP = 0.1%(t - 1), where t = number of years to maturity. If the liquidity premium is 0.5 percent, what is the default risk premium on the corporate bond?

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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Drongo Corporation's 3-year bonds currently yield 6.3 percent and have an inflation premium of 3.3%. The real risk-free rate of interest, r*, is 1.5 percent and is assumed to be constant. The maturity risk premium (MRP) is estimated to be 0.1% (t - 1), where t is equal to the time to maturity. The default risk and liquidity premiums for this company's bonds total 1.3 percent and are believed to be the same for all bonds issued by this company. If the average inflation rate is expected to be 3 percent for years 4, 5, and 6, what is the yield on a 6-year bond for Drongo Corporation? ○ 6.05% 6.45% 6.25% 5.85% 5.65%
Drongo Corporation's 3-year bonds currently yield 4.7 percent and have an inflation premium of 2%. The real risk-free rate of interest, r', is 1.3 percent and is assumed to be constant. The maturity risk premium (MRP) is estimated to be 0.1%(t - 1), where t is equal to the time to maturity. The default risk and liquidity premiums for this company's bonds total 1.2 percent and are believed to be the same for all bonds issued by this company. If the average inflation rate is expected to be 5.4 percent for years 4, 5, and 6, what is the yield on a 6-year bond for Drongo Corporation? 6.1% 6.7% O 7.0% 5.8% O 6.4%
Refer to Table 10-1, which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) decline from 12 percent to 8 percent. a. What is the bond price at 12 percent? b. What is the bond price at 8 percent? c. What would be your percentage return on investment if you bought when rates were 12 percent and sold when rates were 8 percent? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
NikkiG's Corporation's 10-year bonds are currently yielding a return of 6.70 percent. The expected inflation premium is 1.10 percent annually and the real risk-free rate is expected to be 3.40 percent annually over the next ten years. The liquidity risk premium on NikkiG's bonds is 0.20 percent. The maturity risk premium is 0.15 percent on 4-year securities and increases by 0.05 percent for each additional year to maturity. Calculate the default risk premium on NikkiG's 10-year bonds. Note: Round your percentage answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34). Default risk premium
Pelzer Printing Inc. hasbonds outstanding with 9 years left to maturity. The bonds have a 9% annual coupon rate andwere issued 1 year ago at their par value of $1,000. However, due to changes in interest rates,the bond’s market price has fallen to $910.30. The capital gains yield last year was −8.97%.a. What is the yield to maturity?b. For the coming year, what are the expected current and capital gains yields?c. Will the actual realized yields be equal to the expected yields if interest rates change?If not, how will they differ?
Keys Corporation's 5-year bonds yield 6.50%, and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the liquidity premium for Keys' bonds is LP = 0.5% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1)*0.1%, where t = number of years to maturity. Answer the following questions: A. What is the inflation premium (IP) for 5-year bonds? B. What is the default risk premium (DRP) on Keys' bonds? Do not provided hand written solution
Woolworth has 10 per cent coupon bonds making annual payments with a YTM of 6.5 per cent. The bond has a par value of $1000 and the current yield on these bonds is 8.42 per cent. How many years do these bonds have left until they mature? [Please enter the exact value, do not rounding up]
Grohl Co. issued 9-year bonds a year ago at a coupon rate of 7 percent. The bonds make semiannual payments. If the YTM on these bonds is 10 percent, what is the current bond price?
Suppose the coupon rate is 10% issue at par $1000 and for 15 years. Let say the market interest rate decreased to 5% after the bond was issued a) What is the interest payment for this bond annually b) What is the interest payment on semi-annually c) How much should the investors pay for this bondi.e. the value
A particular long-term corporate bond is quoted at 13.55%. Real risk-free rate is constant at 1% while liquidity risk premium is 1.50%. Maturity risk premium and default risk premium are 4.25% and 2%, respectively. Inflation is expected to be 2% and 4% for the next two years, and constant at 6% for the years after. How many years do this corporate issued bond will
A 10-year corporate bond yields 16.5%. The real risk-free rate is 2% which is projected to be constant indefinitely. The expected inflation for year 1 is 1%, for year 2 is 2%, and it will increase by 1% each year after. The default risk premium is twice the liquidity premium and they will remain the same regardless of the maturity year of the bond. Maturity Risk premium for long-term securities is computed as estimated to be 0.5%(t - 1), where t is the maturity of the bond.What is the difference between the yield or interest rate of a an 8-year Government issued bond and 8-year Corporate bond? a. 4.5% b. 1.5% c. 3% d. 5.5% The yield for an 11-year government bond is a. 13% b. 17.5% c. 6% d. 16%
EPS Group has bonds outstanding with a 7.61 percent nominal yield to maturity. The current rate of inflation is 4.2 percent. What is the real rate of return on these bonds?

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