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…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 10QTD

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Recall that on a one-year Treasury security the yield is 4.4600% and 6.0210% 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 0.4%. What is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.
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.
Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 4.20%, 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, hence the pure expectations theory is NOT valid. What rate of return would you expect on a 4-year Treasury security? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. Group of answer choices
Suppose the rate of return on a 10-year T-bond is 5.30%, the expected average rate of inflation over the next 10 years is 1.50%, the MRP on a 10-year T-bond is 0.90%, no MRP is required on a TIPS, and no liquidity premium is required on any Treasury security. Given this information, what should the yield be on a 10-year TIPS? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. a. 2.90% b. 3.80% c. 4.33% d. 4.40% e. 2.86%
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.)
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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%
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%
A.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. a. 9.70% b. 9.12% c. 8.83% d. 8.54% e. 7.47% B. Beranek Corp has $625,000 of assets (which equal total invested capital), and it uses no debt—it is financed only with common equity. The new CFO wants to employ enough debt to raise the total debt to total capital ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? a. $262,500 b. $202,500 c. $250,000 d. $195,000 e. $212,500

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