The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 7% per year for each of the next three years and 6% 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 Pandar Corp.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium U.S. Treasury AAA 0.60% AA 0.80% A 1.05% BBB 1.45% Pandar Corp. issues 11-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. O 10 879%

The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 7% per year for each of the next three years and 6% 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 Pandar Corp.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium U.S. Treasury AAA 0.60% AA 0.80% A 1.05% BBB 1.45% Pandar Corp. issues 11-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. O 10 879%

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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A corporation’s 10-year bonds are currently yielding a return of 6.05 percent. The expected inflation premium is 1.00 percent annually and the real risk-free rate is expected to be 2.10 percent annually over the next ten years. The liquidity risk premium on the bonds is 0.25 percent. The maturity risk premium is 0.10 percent on 2-year securities and increases by 0.05 percent for each additional year to maturity. Calculate the default risk premium on the 10-year bonds. How would an increase in liquidity affect the nominal interest rate?
The applicable risk-free rate component of any 8-year securities is 5.60%. Default risk premium is determined for a corporate security at 1.50%. The maturity risk premium is a function of the number of years for the security to mature and the default risk premium of a corporate issued security. What is the nominal rate of the long-term 8-year government security? (In percentage, type the percentage sign on your answer)
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? 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? 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…
The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 4% per year for each of the next two years and 3% 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 Smith and Carter Inc.’s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium U.S. Treasury — AAA 0.60% AA 0.80% A 1.05% BBB 1.45% Smith and Carter 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. 7.35% 7.70% 8.25% 5.05% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? The yield on a AAA-rated bond will be higher…
A BBB-rated corporate bond has a yield to maturity of 9.6%. A U.S. Treasury security has a yield to maturity of 8.1%. These yields are quoted as APRs with semiannual compounding. Both bonds pay semi-annual coupons at a rate of 9.0% and have five years to maturity. a. What is the price (expressed as a percentage of the face value) of the Treasury bond? b. What is the price (expressed as a percentage of the face value) of the BBB-rated corporate bond? c. What is the credit spread on the BBB bonds?
A company's 5-year bonds are yielding 8% per year. Treasury bonds with the same maturity are yielding 4.9% per year, and the real risk-free rate (r*) is 2.45%. The average inflation premium is 2.05%, and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = number of years to maturity. If the liquidity premium is 0.8%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places. %
A Treasury bond that matures in 10 years has a yield of 4.25%. A 10-year corporate bond has a yield of 9.00%. Assume that the liquidity premium on the corporate bond is 0.70%. What is the default risk premium on the corporate bond? Round your answer to two decimal places.
A BBB-rated corporate bond has a yield to maturity of 10.4 % . AU.S. Treasury security has a yield to maturity of 8.6 % . These yields are quoted as APRs with semi-annual compounding. Both bonds pay semi- annual coupons at a rate of 8.7 % and have five years to maturity. . What is the price (expressed as a percentage of the face value) of the Treasury bond? b. What is the price ( expressed as a percentage of the face value) of the BBB-rated corporate bond? c. What is the credit spread on the BBB bonds? a
Suppose Home Depot issues 30-year bonds on which it pays a 4.00% (nominal) interest rate. Further, suppose that both Home Depot and the purchasers of its bonds anticipate inflation will average 2.00% during the life of the loan. Now suppose the inflation rate after the loan is made (i.e. after the bond is purchased) is actually 1.00% per annum. It follows that the actual real rate of interest is and, ceteris paribus, are (is) better off than anticipated as a result of the difference between the anticipated and the actual rate of inflation. Select one: a. 2.00%, Bondholders b. 2.00%, Home Depot O c. 3.00%, Bondholders d. 3.00%, Home Depot
An investor in Treasury securities expects inflation to be 14,25% in Year 1, 12,20% in Year 2, 9,60%. in Year 3 and 8,00% each year thereafter. Assume that the real risk-free rate is 2,00% and that this rate will remain constant. Three-year Treasury securities yield 12,87%, while 7-year Treasury securities yield 13,47%. What is the difference in the maturity risk premiums (MRPS) on the two securities; that is, what is MRP, - MRP3?
A company's 5-year bonds are yielding 10% per year. Treasury bonds with the same maturity are yielding 5.8% per year, and the real risk-free rate (r*) is 2.85%. The average inflation premium is 2.55%, and the maturity risk premium is estimated to be 0.1 × (t - 1)%, where t = number of years to maturity. If the liquidity premium is 0.4%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
Drongo Corporation's 3-year bonds currently yield 6.3 percent and have an inflation premium of 3.3%. The real risk-free rate of interest, r*, is 1.5 percent and is assumed to be constant. The maturity risk premium (MRP) is estimated to be 0.1% (t - 1), where t is equal to the time to maturity. The default risk and liquidity premiums for this company's bonds total 1.3 percent and are believed to be the same for all bonds issued by this company. If the average inflation rate is expected to be 3 percent for years 4, 5, and 6, what is the yield on a 6-year bond for Drongo Corporation? ○ 6.05% 6.45% 6.25% 5.85% 5.65%

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