Suppose the real risk-free rate of interest is r=4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per yearfor the next two years and 3.90% per year for the next three years. The maturity risk premium is 0.1 x (t-1) %, where t is number of years tomaturity, a liquidity premium is 0.45%, and the default risk premium for a corporate bond is 1.40%,The average inflation during the first 4 years isWhat is the yield on a 4-year Treasury bond?O 6.75%O 8.90%O 4.30%O 7.05%What is the yield on a 4-year BBB-rated bond?O 7.50%O 7.05 %O 8.45%8.90%If the yield on a 5-year Treasury bond is 7.38% and the yield on a 6-year Treasury bond is 7.83%, the expected inflation in 6 years is(Hint: Do not round intermediate calculations.) Now it's time for you to practice what you've learned.Suppose the real risk-free rate of interest is r = 4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per yearfor the next 3 years and 3.90% per year for the next 5 years. The maturity risk premium is 0.1 x (t-1) %, where t is number of years tomaturity, a liquidity premium is 0.45%, and the default risk premium for a corporate bond is 1.40%.Complete the following table by calculating yields on Treasury and corporate bonds of various maturity.The yield on a 4-year Treasury bondThe yield on a 4-year corporate bondThe yield on a 8-year Treasury bondThe yield on a 8-year corporate bondExpected inflation in 9 years, if the yield on a 9-year Treasury bond is 8.07%Value

As per our guidelines, we are supposed to answer only 3 sub-parts (if there are multiple sub-parts…

Suppose the real risk-free rate of interest is r= 4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per year for the next two years and 3.90% per year for the next three years. The maturity risk premium is 0.1 x (t-1) %, where t is number of years to maturity, a liquidity premium is 0.45%, and the default risk premium for a corporate bond is 1.40% The average inflation during the first 4 years is What is the yield on a 4-year Treasury bond? O 6.75 % O 8.90% O 4.30% O 7.05% What is the yield on a 4-year BBB-rated bond? 7.50% 7.05% 8.45% O 8.90% If the yield on a 5-year Treasury bond is 7.38% and the yield on a 6-year Treasury bond is 7.83%, the expected inflation in 6 years is (Hint: Do not round intermediate calculations.)

Suppose the real risk-free rate of interest is r= 4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per year for the next two years and 3.90% per year for the next three years. The maturity risk premium is 0.1 x (t-1) %, where t is number of years to maturity, a liquidity premium is 0.45%, and the default risk premium for a corporate bond is 1.40% The average inflation during the first 4 years is What is the yield on a 4-year Treasury bond? O 6.75 % O 8.90% O 4.30% O 7.05% What is the yield on a 4-year BBB-rated bond? 7.50% 7.05% 8.45% O 8.90% If the yield on a 5-year Treasury bond is 7.38% and the yield on a 6-year Treasury bond is 7.83%, the expected inflation in 6 years is (Hint: Do not round intermediate calculations.)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 10P

See similar textbooks

Similar questions

Suppose the real risk-free rate of interest is r*=4%�*=4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per year for the next two years and 3.90% per year for the next three years. The maturity risk premium is 0.1×(t−1)%0.1×�−1%, where t� is number of years to maturity, a liquidity premium is 0.45%, and the default risk premium for a corporate bond is 1.40%. The average inflation during the first 4 years is2.37% . What is the yield on a 4-year Treasury bond? 4.30% 8.90% 6.75% 7.05% What is the yield on a 4-year BBB-rated bond? 8.90% 7.50% 7.05% 8.45% If the yield on a 5–year Treasury bond is 7.38% and the yield on a 6–year Treasury bond is 7.83%, the expected inflation in 6 years is . (Hint: Do not round intermediate calculations.)
Suppose you are considering two possible investment opportunities: a 12-yearTreasury bond and a 7-year, A-rated corporate bond. The current real risk-free rateis 4%, and inflation is expected to be 2% for the next 2 years, 3% for the following4 years, and 4% thereafter. The maturity risk premium is estimated by this formula:MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimatedto be 0.3%. You may determine the default risk premium (DRP), given thecompany’s bond rating, from the table below. Remember to subtract the bond’s LPfrom the corporate spread given in the table to arrive at the bond’s DRP. Whatyield would you predict for each of these two investments?RateCorporate Bond Yield
Assume that the real risk-free rate of return, k*, is 3%, and it will remain at that level far into the future. Also assume that maturity risk premiums (MRP) increase from zero for bonds that mature in one year or less to a maximum of 1%, and MRP increases by 0.2% for each year to maturity that is greater than one year-that is, MRP equals 0.2% for two-year bond, 0.4% for a three-year bond, and so forth. Following are the expected inflation rates for the next five years: Year Inflation Rate (%) 2017 5 2018 6 2019 7 2020 8 2021 9 a) Compute the interest rate for a one-, two-, three-, four-, and five-year bond. b) If inflation is expected to equal 9% every year after 2021, what should be the interest rate for a 10- and 20-year bond? c) Plot the yield curve for the interest rates you computed in part [a] and [b]. d) Based on the curve (in part c), interpret your findings.
Suppose the real risk-free rate is 2.5%, the average future inflation rate is 2.3%, a maturity premium of 0.07% per year to maturity applies, i.e., MRP = 0.07% (t), where t is the years to maturity. Suppose also that a liquidity premium of 1% and a default risk premium of 0.7% applies to A-rated corporate bonds. How much higher would the rate of return be on a 7-year A-rated corporate bond than on a 5-year Treasury bond. Here we assume that the pure expectations theory is NOT valid. O 1.84% O 1.64% O 1.44% O 1.24% 1.04%
The real risk-free rate of interest, r*, is 4 percent, and it is expected to remain constant over time. Inflation is expected to be 2 percent per year for the next three years, after which time inflation is expected to remain at a constant rate of 5 percent per year. The maturity risk premium is equal to 0.1(t - 1)%, where t = the bond’s maturity. What is the yield on a 10-year Treasury bond?
Suppose the real risk - free rate is 3.50 %, the average future inflation rate is 2.50%, a maturity premium of 0.20% per year to maturity applies, i.e., MRP = 0.20% (t), where t is the number of years to maturity. Suppose also that a liquidity premium of 0.50% and a default risk premium of 2.70% applies to A-rated corporate bonds. What is the difference in the yields on a 5-year A - rated corporate bond and on a 10-year Treasury bond? Here we assume that the pure expectations theory is NOT valid, and disregard any cross - product terms, i.e., if averaging is required, use the arithmetic average. a. 4.90 p. p. b. 3.20 p.p. c. 4.11 p.p. d. 2.70 p.p. e. 2.20 p.p.
Suppose the real risk-free rate is 2.80%, the average future inflation rate is 2.30%, a maturity premium of 0.25% per year to maturity applies, i.e., MRP = 0.25%(t), where t is the number of years to maturity. Suppose also that a liquidity premium of 0.50% and a default risk premium of 2.50% applies to A-rated corporate bonds. What is the difference in the yields on a 5-year A-rated corporate bond and on a 10-year Treasury bond? Here we assume that the pure expectations theory is NOT valid, and disregard any cross-product terms, i.e., if averaging is required, use the arithmetic average. a. 4.25 p.p. b. 2.25 p.p. c. 4.19 p.p. d. 3.00 p.p. e. 1.75 p.p. Please explain process and show calculations
The real risk-free rate is 2.25%. Inflation is expected to be 2.5%this year and 4.25% during the next 2 years. Assume that the maturity risk premium iszero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasurysecurities?
The risk free rate of interest is 2.0%. Inflation is expected to be 8.0% this year, 6.5% next year and 2.5% in each of the following years. Assume the liquidity premium is fixed at 0.5%; maturity riskpremium is calculated to be .1% x (t-1); and default risk premium is fixed at 1.5% for years 1-5 and 2% for years 6-20. Calculate the rate for the following:a) A 9 year bond?b) A 2 year bond? Please do it in excel show the fomulas please
Suppose the real risk-free rate of interest is 3% and inflation is expected to be 2% and 3% over the next two years. If a 2-year Treasury security yields 6%, what is the maturity risk premium for the 2-year Treasury security? 1.5% 0.5% 0.2% O 1.0%
The real risk-free rate is 2% which is projected to be constant indefinitely. The expected inflation for year 1 is 1%, for year 2 is 2%, and it will increase by 1% each year after. Liquidity Premium is 1% and the default risk premium is 2.5%. Maturity Risk premium for long-term securities is computed as estimated to be 0.5%(t - 1), where “t” is the years of maturity of the bond. The yield for an 15-year government bond is a. 17.0% b. 17.5% c. 60.0% d. 16.0%
The real risk-free rate is 2% which is projected to be constant indefinitely. The expected inflation for year 1 is 1%, for year 2 is 2%, and it will increase by 1% each year after. Liquidity Premium is 1% and the default risk premium is 2.5%. Maturity Risk premium for long-term securities is computed as estimated to be 0.5%(t - 1), where the variable “t” is an independent variable that shows the years of maturity of the bond. How much is the difference between the nominal rate of a 7-year long-term government issued bond and 7-year long-term corporate issued bond? a. 3.5% b. 1.5% c. 3.3% d. 5.5%