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What is the maturity risk premium (MRP) on all 5-year bonds?

What is the maturity risk premium (MRP) on all 5-year bonds?

Essentials Of Investments
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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Kelly Inc's 5-year bonds yield 7.50% and 5-year T-bonds yield 4.50%. The real risk-free rate is r* = 2.5%, the default risk premium for Kelly's bonds is DRP = 0.40%, the liquidity premium on Kelly's bonds is LP = 2.6% versus zero on T-bonds, and the inflation premium (IP) is 1.5%. What is the maturity risk premium (MRP) on all 5-year bonds?
Answer 0.38%
0.50%
0.40%
0.59%
0.56%

Expert Solution
Step 1: Formula

We can determine the maturity risk premium using the formula below:

table row cell M R P thin space end cell equals cell space K e l l y apostrophe s space B o n d space Y i e l d space minus space r e a l space r i s k f r e e space r a t e space minus space i n f l a t i o n space minus space D R P space minus space L P end cell row blank blank blank end table

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