The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next five years and 7% 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 Moq Computer Corp.'s bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating U.S. Treasury AAA AA A BBB O 11.93% O 12.98% Moq Computer Corp. issues eight-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 12.28% Default Risk Premium O 5.35% 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? A BBB-rated hond has a lower default

The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next five years and 7% 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 Moq Computer Corp.'s bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating U.S. Treasury AAA AA A BBB O 11.93% O 12.98% Moq Computer Corp. issues eight-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 12.28% Default Risk Premium O 5.35% 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? A BBB-rated hond has a lower default

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 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.
The 10-year bonds of Gator Corporation are yielding 8 percent per year. Treasury bonds with the same maturity are yielding 6.4 percent per year. The real risk-free rate (k*) has not changed in recent years and is 3 percent. The average inflation premium is 2.5 percent and the maturity risk premium takes the form: MRP = 0.1%(t - 1), where t = number of years to maturity. If the liquidity premium is 0.5 percent, what is the default risk premium on the corporate bond?
An investor in Treasury securities expects inflation to be 2.2% in Year 1, 2.7% in Year 2, and 3.65% each year thereafter. Assume that the real risk-free rate is 2.45% and that this rate will remain constant. Three-year Treasury securities yield 5.50%, while 5-year Treasury securities yield 7.00%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is MRP5 - MRP3? Do not round intermediate calculations. Round your answer to two decimal places.
The real risk-free rate is 3 percent. Inflation is expected to average 2 percent a year for the next 3 years, after which the inflation is expected to average 3.5 percent a year. Assume that there is no maturity risk premium. A 7-year corporate bond has a yield of 7.6 percent. Assume that the liquidity premium on the corporate bond is 0.4 percent. What is the default risk premium on the corporate bond?
The real risk-free rate, r*, is 1.4%. Inflation is expected to average 1.2% a year for the next 4 years, after which time inflation is expected to average 4.3% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 10.7%, which includes a liquidity premium of 0.7%. What is its default risk premium? Do not round intermediate calculations. Round your answer to two decimal places.
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
If the real rate of interest is 2%, inflation is expected to be 3% during the coming year, and the default risk premium, illiquidity risk premium, and maturity risk premium for the Bonds-R-Us Corporation are all 1% each, what would be the yield (stated rate) on a Bonds-R-Us bond?
A 5-year Treasury bond has a 4.6% yield. A 10-year Treasury bond yields 6.3%, and a 10-year corporate bond yields 8.85%. The market expects that inflation will average 2.1% over the next 10 years (IP10 = 2.1%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP = LP = 0.) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. X Open spreadsheet What is the yield on this 5-year corporate bond? Round your answer to two decimal places. %
A particular long-term corporate bond is quoted at 13.55%. Real risk-free rate is constant at 1% while liquidity risk premium is 1.50%. Maturity risk premium and default risk premium are 4.25% and 2%, respectively. Inflation is expected to be 2% and 4% for the next two years, and constant at 6% for the years after. How many years do this corporate issued bond will
A company's 5-year bonds are yielding 8% per year. Treasury bonds with the same maturity are yielding 4.2% per year, and the real risk-free rate (r*) is 2.15%. The average inflation premium is 1.65%, 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.
A 10-year corporate bond yields 16.5%. 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. The default risk premium is twice the liquidity premium and they will remain the same regardless of the maturity year of the bond. Maturity Risk premium for long-term securities is computed as estimated to be 0.5%(t - 1), where t is the maturity of the bond.What is the difference between the yield or interest rate of a an 8-year Government issued bond and 8-year Corporate bond? a. 4.5% b. 1.5% c. 3% d. 5.5% The yield for an 11-year government bond is a. 13% b. 17.5% c. 6% d. 16%

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