National Co. 5-year long-term bonds currently yield 10%. The real risk free rate is 2%. The maturity risk premium is estimated to be 1%(t - 1), where t represents the number of years to maturity. The combined default risk and liquidity premiums for the company issued bonds total 2% and are constant for all bonds issued by the company regardless of the number of years until maturity. If the inflation rate is constant for the first five years and expected to be 5% for year 6, and 6% for year 7, what is the yield on a 7-year long-term bond for National Co.?
National Co. 5-year long-term bonds currently yield 10%. The real risk free rate is 2%. The maturity risk premium is estimated to be 1%(t - 1), where t represents the number of years to maturity. The combined default risk and liquidity premiums for the company issued bonds total 2% and are constant for all bonds issued by the company regardless of the number of years until maturity. If the inflation rate is constant for the first five years and expected to be 5% for year 6, and 6% for year 7, what is the yield on a 7-year long-term bond for National Co.?
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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National Co. 5-year long-term bonds currently yield 10%. The real risk free rate is 2%. The maturity risk premium is estimated to be 1%(t - 1), where t represents the number of years to maturity. The combined default risk and liquidity premiums for the company issued bonds total 2% and are constant for all bonds issued by the company regardless of the number of years until maturity. If the inflation rate is constant for the first five years and expected to be 5% for year 6, and 6% for year 7, what is the yield on a 7-year long-term bond for National Co.?
(Format: XX.XX%)
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