Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 2, Problem 9SP
Summary Introduction
To determine: The default risk premium on company bonds.
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(Calculating the default-risk premium) At present, 10-year Treasury bonds are yielding 4.1% while a 10-year
corporate bond is yielding 6.4%. If the liquidity-risk premium on the corporate bond is 0.5%, what is the
corporate bond's default-risk premium? Note that a Treasuty security should have no default-risk premium
and liquidity-risk premium
If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 9.2%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?
If 10-year Treasury bonds have a yield of 4.3%, 10-year corporate bonds yield 6.7%, the maturity risk premium on all 10-year bonds is same, and corporate bonds have a 0.3% liquidity premium vs. a zero liquidity premium for T-bonds,what is the default risk premium on the corporate bond?
Chapter 2 Solutions
Foundations Of Finance
Ch. 2 - Prob. 1RQCh. 2 - Prob. 2RQCh. 2 - Prob. 3RQCh. 2 - Prob. 4RQCh. 2 - Prob. 5RQCh. 2 - Prob. 6RQCh. 2 - Prob. 7RQCh. 2 - Prob. 8RQCh. 2 - Prob. 9RQCh. 2 - Prob. 10RQ
Ch. 2 - Prob. 11RQCh. 2 - Prob. 12RQCh. 2 - Prob. 13RQCh. 2 - Prob. 14RQCh. 2 - Prob. 15RQCh. 2 - Prob. 1SPCh. 2 - Prob. 2SPCh. 2 - Prob. 3SPCh. 2 - Prob. 4SPCh. 2 - Prob. 5SPCh. 2 - Prob. 6SPCh. 2 - Prob. 7SPCh. 2 - Prob. 8SPCh. 2 - Prob. 9SPCh. 2 - Prob. 10SPCh. 2 - Prob. 11SPCh. 2 - (Interest rate determination) Youre looking at...Ch. 2 - Prob. 13SPCh. 2 - (Yield curve) If yields on Treasury securities...Ch. 2 - (Unbiased expectations theory) Currently you have...Ch. 2 - Prob. 2MCCh. 2 - Prob. 3MCCh. 2 - Prob. 4MCCh. 2 - Prob. 5MC
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- Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 8.90%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10- year bonds is 1.15%. What is the default risk premium on corporate bonds? A) 3.08% B) 3.35% 2.95% D) 4.12% E) 3.12%arrow_forwardIf 15-year T-bonds have a yield of 6%, 15-year corporate bonds yield 8%, the maturity risk premium on all 15-year bonds is 1%, and corporate bonds have a 0.5% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond? (hint: think about what cause the difference in the yields of the 15-year T-bonds and the 15-Year corporate bonds) A. 1.0% B. 0.5% C. 2.0% D. 0.6% E. 1.5%arrow_forwardSuppose 10-year T-bonds have a yield of 5.00% and 10-year corporate bonds yield 8.05%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds? a. 3.30% b. 7.80% c. 3.05% d. 5.25% e. 2.80%arrow_forward
- Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 8.50%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds? 3.33 % 2.95% 2.92% 2.68 % 2.86 %arrow_forwardSuppose 10-year bonds issued by the premium versus a zero liquidity premium for the &i government bonds. And the maturity risk premium on both 10-year bonds is 1.15%. What is the default risk premium on Zai bonds? government have a yield of 5.78% and Zan 10-year bonds have a yield of 8.78%. Also, Zgi bonds have a 0.85% liquidity Default risk premium on Zai bonds is % (use 2 decimals)arrow_forwardIf 8-year T-bonds have a yield of 6.36%, 8-year corporate bonds yield 8.36%, the maturity risk premium on all 8-year bonds is 1.22%, and corporate bonds have a 0.35% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond? Group of answer choices 1.77% 1.75% 1.80% 1.65% 1.62%arrow_forward
- If 10-year T-bonds have a yield of 7.1%, 10-year corporate bonds yield 9.7%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond? O a. 2.60% O b. 2.20% O c. 3.00% O d. 5.80% O e. 0.90%arrow_forwardAn investor gathers the following data on three newly-issued bonds: 1-year government bond, 3.0% yield 1-year ABC corporate bond, 4.2% yield 10-year government bond, 3.8% yield If investors require a 0.5% liquidity premium for corporate bonds, what are the components of the required return on a 10-year ABC bond?arrow_forwardConsider two types of bonds: A 10 year to maturity corporate bond and a 10 year to maturity Treasury bond. We know that Corporate Bonds have default risk. Discuss the impact on the markets for these two type of bonds & on the risk premium when there is a FALL in the risk of corporate default? Provide a DISCUSSION of the impact and ILLUSTRATE the impact graphically using two diagrams, one for corporate bonds and one for Treasuries. The diagrams should show the impact on each yield and the impact on the risk premium [label your diagram clearly to illustrate the old premium vs. the new premium]. hint: draw your diagrams side by side, so you can show the risk premiums as done in lecture.arrow_forward
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