The Gergen Group's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rat 3.4%, the default risk premium for Gergen's bonds is DRP = 0.85% versus zero for T-bonds, the liqu premium on Gergen's bonds is LP = 1.25%, and the maturity risk premium for all bonds is found wit formula MRP (t-1) x 0.1%, where t = number of years to maturity. What is the inflation premium year bonds? Select the correct answer. O a. 1.23% O b. 0.81% O c. 1.09% O d. 0.95% e. 0.67% A
The Gergen Group's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rat 3.4%, the default risk premium for Gergen's bonds is DRP = 0.85% versus zero for T-bonds, the liqu premium on Gergen's bonds is LP = 1.25%, and the maturity risk premium for all bonds is found wit formula MRP (t-1) x 0.1%, where t = number of years to maturity. What is the inflation premium year bonds? Select the correct answer. O a. 1.23% O b. 0.81% O c. 1.09% O d. 0.95% e. 0.67% A
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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Transcribed Image Text:The Gergen Group's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rate is rº =
3.4%, the default risk premium for Gergen's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity
premium on Gergen's bonds is LP = 1.25%, 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. What is the inflation premium (IP) on 5-
year bonds?
Select the correct answer.
O a. 1.23%
Ob. 0.81%
O c. 1.09%
O d. 0.95%
e. 0.67%

Transcribed Image Text:Reinegar Corporation is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value,
and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also
have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 3.25%. If both bonds are
to provide investors with the same effective yield, how many of the OID bonds must Reinegar issue to raise
$3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.
Select the correct answer.
O a. 7,816
b. 7,812
c. 7,808
O d. 7,820
e. 7,804
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