The following information was gathered by a security analyst. The real rate of interest is 4% and is expected to remain constant for the next 5 years, Inflation is expected to be 2% next year, 3.5% the following year, 5% the third to fifth year. The maturity risk premium is expected to be 0.3 x (t-1)%, The liquidity premium on relevant 5-year securities is 0.75% and the default risk premium on relevant 5-year securities is 0.6%. What is the yield in percent on a 5-year 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
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  1. The following information was gathered by a security analyst. The real rate of interest is 4% and is expected to remain constant for the next 5 years, Inflation is expected to be 2% next year, 3.5% the following year, 5% the third to fifth year. The maturity risk premium is expected to be 0.3 x (t-1)%, The liquidity premium on relevant 5-year securities is 0.75% and the default risk premium on relevant 5-year securities is 0.6%. What is the yield in percent on a 5-year corporate bond?
  2. A 10-year Treasury bond yields 6.4%, and a 10-year corporate bond yields 8.4%. The market expects that inflation will average 2.5% over the next 10 years. Assume that maturity risk premium is equal to 0.3(T-1)%, and that the annual real risk-free rate will remain constant over the next 10 years. What is the liquidity risk premium of the 10-year treasury bond?
  3. A 10-year Treasury bond yields 6.4%, and a 10-year corporate bond yields 8.4%. The market expects that inflation will average 2.5% over the next 10 years. A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond. What is the yield in percent on the 5-year corporate bond if a 5-year Treasury bond has a 5.2% yield? Assume that there is no maturity risk premium and that the annual real risk-free rate will remain constant over the next 10 years.
  4. A Treasury bond that matures in 10 years has a yield of 8%. A 10-year corporate bond has a yield of 12% and liquidity premium of 2%. What is the default risk premium on the corporate bonds?
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