UPöngo Corporation's 3-year bonds currently yield 4.7 percent and have an inflation premium of 2%. The real risk-free rate of interest, r, is 1.3 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 1.2 percent and are believed to be the same for all bonds issued by this company. If the average inflation rate is expected to be 5.4 percent for years 4, 5, and 6, what is the yield on a 6-year bond for Drongo Corporation? 6.1% 6.7% O 7.0% O 5.8% 6.4%

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
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Drongo Corporation's 3-year bonds currently yield 4.7 percent and
have an inflation premium
of 2%. The real risk-free rate of interest, r', is 1.3 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 1.2 percent
and are believed to be the same for all bonds issued by this company.
If the average inflation
rate is expected to be 5.4 percent for years 4, 5, and 6, what is the
yield on a 6-year bond for
Drongo Corporation?
6.1%
6.7%
O 7.0%
5.8%
O 6.4%
Transcribed Image Text:Drongo Corporation's 3-year bonds currently yield 4.7 percent and have an inflation premium of 2%. The real risk-free rate of interest, r', is 1.3 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 1.2 percent and are believed to be the same for all bonds issued by this company. If the average inflation rate is expected to be 5.4 percent for years 4, 5, and 6, what is the yield on a 6-year bond for Drongo Corporation? 6.1% 6.7% O 7.0% 5.8% O 6.4%
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