The real risk-free rate of interest, r*, is 3%. Inflation is expected to be 4% this year, 5 percent next year, and 3% per year thereafter. The maturity risk premium equals 0.1%(t - 1), where t equals the bond’s maturity. That is, a 5-year bond has a maturity risk premium of 0.4% or 0.004. A 5-year corporate bond yields 8%. What is the yield on a 10-year corporate bond that has the same default risk and liquidity premiums as the 5-year corporate bond?

The real risk-free rate of interest, r*, is 3%. Inflation is expected to be 4% this year, 5 percent next year, and 3% per year thereafter. The maturity risk premium equals 0.1%(t - 1), where t equals the bond’s maturity. That is, a 5-year bond has a maturity risk premium of 0.4% or 0.004. A 5-year corporate bond yields 8%. What is the yield on a 10-year corporate bond that has the same default risk and liquidity premiums as the 5-year corporate bond?

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

What would be the value of the bond described in Part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we now have a discount or a premium bond? What would happen to the bond’s value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond? What would happen to the value of the 10-year bond over time if the required rate of return remained at 13%? If it remained at 7%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N, and then change N to see what happens to the PV as the bond approaches maturity.)
The real risk-free rate of interest, r*, is 3%. Inflation is expected to be 4% this year, 5 percent next year, and 3% per year thereafter. The maturity risk premium equals 0.1%(t - 1), where t equals the bond’s maturity. That is, a 5-year bond has a maturity risk premium of 0.4% or 0.004. A 5-year corporate bond yields 8%. What is the yield on a 10-year corporate bond that has the same default risk and liquidity premiums as the 5-year corporate bond? 8.4% 7.2% 8.2% 6.8% 8.0%
The real risk-free rate of interest, r*, is 3%. Inflation is expected to be 4% this year, 5 percent next year, and 3% per year thereafter. The maturity risk premium equals 0.1% (t-1), where t equals the bond's maturity. That is, a 5-year bond has a maturity risk premium of 0.4% or 0.004. A 5-year corporate bond yields 8%. What is the yield on a 10-year corporate bond that has the same default risk and liquidity premiums as the 5-year corporate bond? A. 7.2% B. 8.0% C. 6.8% D. 8.2% E. 8.4%
The real risk-free rate of interest, k* is 3 percent. Inflation is expected to be 4 percent this year, 5 percent next year, and 3 percent per year thereafter. The maturity risk premium equals 0.1% (t - 1), where t equals the bond's maturity. That is a 5-year bond has a maturity risk premium of 0.4 percent. A 5-year corporate bond yields 8 percent. What is the yield on a 10-year corporate bond that has the same default risk and liquidity premium as the 5 -year corporate bond?
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?
The real risk-free rate is 3 percent. Inflation is expected to average 2 percent a year for the next 3 years, after which the inflation is expected to average 3.5 percent a year. Assume that there is no maturity risk premium. A 7-year corporate bond has a yield of 7.6 percent. Assume that the liquidity premium on the corporate bond is 0.4 percent. What is the default risk premium on the corporate bond?
The real risk-free rate, r*, is 4.5%, and it is expected to remain constant over time. Inflation is expected to be 2% per year for the next three years, after which time inflation is expected to remain at a constant rate of 3% 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?
The real risk-free rate of interest, r*, is 3%, and it is expectedto remain constant over time. Inflation is expected to be 2% per year for the next 3 years and4% per year for the next 5 years. The maturity risk premium is equal to 0.1 x (t - 1)%, wheret 5 the bond’s maturity. The default risk premium for a BBB-rated bond is 1.3%.a. What is the average expected inflation rate over the next 4 years?b. What is the yield on a 4-year Treasury bond?c. What is the yield on a 4-year BBB-rated corporate bond with a liquidity premium of 0.5%?d. What is the yield on an 8-year Treasury bond?e. What is the yield on an 8-year BBB-rated corporate bond with a liquidity premium of 0.5%?f. If the yield on a 9-year Treasury bond is 7.3%, what does that imply about expectedinflation in 9 years?
Suppose the real risk-free rate of interest is 2%. Inflation is expected to be 2% for 2 years and then 3% thereafter. The maturity risk premium is 0.2% (t). where t is the number of years until maturity. The default risk premium is 2%. The liquidity premium is 1%. What is the nominal interest rate on a 4 year bond? 9.1% 7.8% 7.1%
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? 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.)
The real risk-free rate, , is 1.7%. Inflation is expected to average 1.5% a year for the next 4 years, after which time inflation is expected to average 4.8% a year. Assume that there is no maturity risk premium. An 11-year corporate bond has a yield of 8.7%, which includes a liquidity premium of 0.3%. What is its default risk premium?
A 10-year Treasury bond yields 6.4%, and a 10-year corporate bond yields 8.4%. The market expects that inflation will average 2.5% over the next 10 years. Assume that maturity risk premium is equal to 0.3(T-1)%, and that the annual real risk-free rate will remain constant over the next 10 years. What is the liquidity risk premium of the 10-year treasury bond?