3 The real risk-free rate (r) is 2.8% and is expected to remain constant. Inflation is expected to be 5% per year for each of the next five years and 4%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 allLiukin Holdings Inc.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP):RatingU.S. TreasuryAAAAAABBBO 9.00%Liukin Holdings Inc. issues 10-year, AA-rated bonds. What the yield on one of these bonds? Disregard cross-product terms; that is, if averaging isrequired, use the arithmetic average.O 5.05%O 8.65%Default Risk Premium9.55%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?O The yield on U.S. Treasury securities always remains static.O Higher inflation expectations increase the nominal interest rate demanded by investors.

Data given: Risk free rate=2.8% Inflation= 5% per year for each of the next 5 year & 4%…

The real risk-free rate (r) is 2.8% and is expected to remain constant. Inflation is expected to be 5% per year for each of the next five years and 4% 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 Liukin Holdings Inc.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating U.S. Treasury AAA AA A BBB O 9.00% O 5.05% Liukin Holdings Inc. issues 10-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. 8.65% Default Risk Premium O9.55% 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? O The yield on U.S. Treasury securities always remains static. O Higher inflation expectations increase the nominal interest rate demanded by investors.

The real risk-free rate (r) is 2.8% and is expected to remain constant. Inflation is expected to be 5% per year for each of the next five years and 4% 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 Liukin Holdings Inc.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating U.S. Treasury AAA AA A BBB O 9.00% O 5.05% Liukin Holdings Inc. issues 10-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. 8.65% Default Risk Premium O9.55% 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? O The yield on U.S. Treasury securities always remains static. O Higher inflation expectations increase the nominal interest rate demanded by investors.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 10P

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