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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Transcribed Image Text: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%
O 12.28%
Default Risk Premium
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 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?
OA BBB-rated bond has a lower default risk premium as compared to an AAA-rated bond.
Transcribed Image Text:5.35%
Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true?
O A BBB-rated bond has a lower default risk premium as compared to an AAA-rated bond.
O An AAA-rated bond has less default risk than a BB-rated bond.
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