CFIN
5th Edition
ISBN: 9781305661639
Author: Scott Besley, Eugene Brigham
Publisher: Cengage Learning
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Question
Chapter 5, Problem 18PROB
Summary Introduction
Yield:
Yield is the return to be earned from an investment, if hold it for a specific period.
Yield includes payment of interest or dividend but does not include capital appreciation.
Calculate the yield as follows:
Given six months Treasury bill yield is 3.2%. Company F bonds matures in three years and yield is 5% and 7 years bonds yield is 5.8%. Bonds does not have liquidity premium.
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Currently, a one-year Treasury bill is yielding 3.8 percent. Company F's three-year bond has a yield equal to 5.1 percent, and its seven-year bond has a yield equal to 5.9 percent. Although none of the bonds has a liquidity premium, any bond with a maturity equal to one year or longer has a maturity risk premium (MRP). Except for their terms to maturity, the characteristics of the bonds are the same.
Compute the annual MRP associated with the bonds. Round your answer to one decimal place.
%
Compute the default risk premium (DRP) associated with the bonds. Round your answer to one decimal place.
%
Consider an A-rated bond and a B-rated bond. Assume that the one-year probabilities of default for the A- and B-rated bonds are 1% and 3%, respectively, and that default correlation between the two bonds is 20%. What is the joint probability of default of the two bonds?
Assume that the real, risk-free rate of interest is expected to be constant over time at 3 percent, and
that the annual yield on a 6-year corporate bond is 8.00 percent, while the annual yield on a 10-year
corporate bond is 7.75 percent: you may assume that the default risk and liquidity premium are the
same for both bonds. Also assume that the maturity risk premium for all securities can be estimated
as MRP, (0.1%) *(t-1), where t is the number of periods until maturity. Finally assume that
inflation is expected to be constant at 3 percent for Years 1-6, and then constant at some rate for
Years 7-10 (4 years). Given this information, determine what the market must anticipate the average
annual rate of inflation will be for Years 7-10.
2.583%
O 1979%
2.281%
1.375 %
O 1.677 %
4
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