The Habender Company just issued a two year bond... Please provide solution this financial accounting question The Habender Company just issued a two-yearbond at 12%. Inflation is expected to be 4% nextyear and 6% the year after. Habender estimatesits default risk premium at about 1.5% and itsmaturity risk premium at about .5%. Because it'sa relatively small and unknown firm, its liquidityrisk premium is about 2% even on relatively shortdebt like this. What pure interest rate is impliedby these assumptions?

Step 1: Define Interest RatesThe interest rate for a financial asset may be depicted in real terms…

Answered: The Habender Company just issued a…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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A real risk-free rate is currently -1.0%. A broker at INV Securities, has given you the following estimates of current interest rate premiums: Inflation: 6%, Liquidity Risk Premium 2%, Maturity Risk Premium 2%, and Default Risk Premium 5%. Based on these data, what is the rate of short-term U.S. Treasuries? O 5.0% O 4.0% O 1.5% O 3.0%
The real risk-free rate, r, is 1.3%. Inflation is expected to average 1.1% a year for the next 4 years, after which time inflation is expected to average 3.8% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 9.8%, which includes a liquidity premium of 0.4%. What is its default risk premium? Do not round Intermediate calculations. Round your answer to two decimal places.
Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 6.60%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.
Due to a recession, expected inflation this year is only 3.25%. However, the inflationrate in Year 2 and thereafter is expected to be constant at some level above 3.25%. Assumethat the expectations theory holds and the real risk-free rate (r*) is 2.5%. If the yield on 3-yearTreasury bonds equals the 1-year yield plus 1.5%, what inflation rate is expected after Year 1?
Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 4.00%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Include the cross-product term, i.e., if averaging is required, use the geometric average. (Round your final answer to 2 decimal places.)
The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. Based on the pure expectations theory, is the following statement true or false? A certificate of deposit (CD) for two years will have the same yield as a CD for one year followed by an investment in another one-year CD after one year True False The yield on a one-year Treasury security is 5.6100%, and the two-year Treasury security has a 8.4200% yield. Assuming that the pure expectations theory is correct, what is the market's estimate of the one-year Treasury rate one year from now? 14.3637% 9.6135% 11.3100% 12.8934% Recall that on a one-year Treasury security the yield is 5.6100% and 8.4200% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.2000%. What is the market's estimate of the one-year Treasury rate one year from now? 12.4260%…
The real risk-free rate is 2.70%, inflation is expected to be 3.45% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, i.e., if averaging is required, use the arithmetic average, what is the equilibrium rate of return on a 1-year Treasury bond? Please explain process and show calculations
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The real risk-free rate, r*, is 1.7%. Inflation is expected to average 1.4% a year for the next 4 years, after which time inflation is expected to average 4.4% a year. Assume that there is no maturity risk premium. A 9-year corporate bond has a yield of 11.0%, which includes a liquidity premium of 0.2%. What is its default risk premium? Do not round intermediate calculations. Round your answer to two decimal places. 3.2 % Hide Feedback
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. Liquidity Premium is 1% and the default risk premium is 2.5%. Maturity Risk premium for long-term securities is computed as estimated to be 0.5%(t - 1), where the variable “t” is an independent variable that shows the years of maturity of the bond. How much is the difference between the nominal rate of a 7-year long-term government issued bond and 7-year long-term corporate issued bond? a. 3.5% b. 1.5% c. 3.3% d. 5.5%
The real risk-free rate, r*, is 1.9%. Inflation is expected to average 1.6% a year for the next 4 years, after which time inflation is expected to average 5.1% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 10.9%, which includes a liquidity premium of 0.2%. What is its default risk premium? Do not round intermediate calculations. Round your answer to two decimal places. decimal places. %
Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 3.10%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP 0.10% (t), where t is the years to maturity, hence the pure expectations theory is NOT valid. What rate of return would you expect on a 4-year Treasury security? O 7.80% O 7.90% O 7.70% O 8.10% O 8.00%

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