Drongo Corporation's 4-year bonds currently yield 7.7 percent and have an inflationpremiumof 3.7%. The real risk-free rate of interest, r*, is 2.6 percent and is assumed to beconstant.The maturity risk premium (MRP) is estimated to be 0.1% (t-1), where t is equal tothe time tomaturity. The default risk and liquidity premiums for this company's bonds total 1.1percentand are believed to be the same for all bonds issued by this company. If the averageinflationrate is expected to be 4 percent for years 5 and 6, what is the yield on a 6-year bondforDrongo Corporation?8.00%O 8.50%9.00%9.50%10.00%

Yield on the corporate bond have many components risk free rate, inflation and maturity risk premium…

Answered: Drongo Corporation's 4-year bonds…

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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McCurdy Co.'s Class Q bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid semiannually, and those bonds sell at their par value. McCurdy's Class P bonds have the same risk, maturity, and par value, but the P bonds pay a 5.75% annual coupon. Neither bond is callable. At what price should the annual payment bond sell?
Keys Corporation's 5-year bonds yield 6.20% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the liquidity premium for Keys' bonds is LP = 0.5% versus zero for T- bonds, and the maturity risk premium for all bonds is found with the formula MRP =(t-1) x 0.1%; where t = number of years to maturity. What is the default risk premium (DRP) on Keys' bonds? 1.17% 1.30% 1.43% 1.57% 1.73%
A Treasury bond due in 1 year has a yield of 3.5%, while a Treasury bond due in 5 years has a yield of 7.5%. A bond due in 5 years issued by High Country Marketing Corp. has a yield of 13%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield of 5%. The default risk premium on the 5-year bonds issued by High Country Marketing Corp. is _________. Note: Express your answers in strictly numerical terms. For example, if the answer is 5%, write 0.05"
Preston Corporation has a bond outstand with $110 annual interest payment , market price of $1,200, and a maturity date for five years. Find the bond yields C. The approximate yield to maturity.
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%
You are considering an investment in 20-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T - bills are currently earning 0.50 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:Real risk-free rateDefault risk premiumLiquidity 0.41% = 1.05 % = 0.90% = 0.75% risk premiumMaturity risk premium = a. What is the inflation premium?b. What is the fair interest rate on Moore Corporation 20-year bonds?
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills page 55are currently earning 3.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real risk-free rate = 2.25% Default risk premium = 1.15% Liquidity risk premium = 0.50% Maturity risk premium = 1.75% What is the inflation premium? What is the fair interest rate on Moore Corporation 30-year bonds?
Dakota Corporation 15-year bonds have an equilibrium rate of return of 8 percent. For all securities, the inflation risk premium is 1.75 percent and the real risk-free rate is 3.50 percent. The security’s liquidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent. The security has no special covenants. Calculate the bond’s default risk premium. (Round your answer to 2 decimal places.)
Moerdyk Corporation's bonds have a 25-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 8.20%, based on semiannual compounding. What is the bond's price? a. $937.23 Ob.$918.85 Oc. $689.14 Od. $899.68 Oe. $854.53
If 10-year T-bonds have a yield of 4.0%, 10-year corporate bonds yield 7.6%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.23% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond? Round 2 decimal places
Squire Inc.'s 5-year bonds yield 12.25%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Squire's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t − 1) × 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Squire's bonds? Select the correct answer. a. 6.57% b. 6.25% c. 6.41% d. 6.73% e. 6.09%
Corporation's 10-year bonds have an equilibrium rate of return is 9.00 percent. For all securities, the inflation risk premium is 1.68 percent and the real interest rate is 3.18 percent. The security's liquidity risk premium is .33 percent and maturity risk premium is .88 percent. The security has no special covenants. What is the bond's default risk premium? A - 2.93% B - 11.71% C - 1.80% D - 6.07%

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