The real risk-free rate (r) is 2.8% and is expected to remain constant. Inflation is expected to be 5% per year for each of the next five years and 4% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t-1) %, where t is the security's maturity. The liquidity premium (LP) on all Liukin Holdings Inc.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating U.S. Treasury AAA AA A BBB O 9.00% O 5.05% Liukin Holdings Inc. issues 10-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. 8.65% Default Risk Premium O9.55% 0.60% 0.80% 1.05% 1.45% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O The yield on U.S. Treasury securities always remains static. O Higher inflation expectations increase the nominal interest rate demanded by investors.
The real risk-free rate (r) is 2.8% and is expected to remain constant. Inflation is expected to be 5% per year for each of the next five years and 4% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t-1) %, where t is the security's maturity. The liquidity premium (LP) on all Liukin Holdings Inc.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating U.S. Treasury AAA AA A BBB O 9.00% O 5.05% Liukin Holdings Inc. issues 10-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. 8.65% Default Risk Premium O9.55% 0.60% 0.80% 1.05% 1.45% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O The yield on U.S. Treasury securities always remains static. O Higher inflation expectations increase the nominal interest rate demanded by investors.
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 real risk-free rate (r) is 2.8% and is expected to remain constant. Inflation is expected to be 5% per year for each of the next five years and 4%
thereafter.
The maturity risk premium (MRP) is determined from the formula: 0.1(t-1)%, where t is the security's maturity. The liquidity premium (LP) on all
Liukin Holdings Inc.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP):
Rating
U.S. Treasury
AAA
AA
A
BBB
O 9.00%
Liukin Holdings Inc. issues 10-year, AA-rated bonds. What the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is
required, use the arithmetic average.
O 5.05%
O 8.65%
Default Risk Premium
9.55%
0.60%
0.80%
1.05%
1.45%
Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true?
O The yield on U.S. Treasury securities always remains static.
O Higher inflation expectations increase the nominal interest rate demanded by investors.
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