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 risk premium 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) A9 year bond? b) A 2 year bond?
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 risk premium 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) A9 year bond? b) A 2 year bond?
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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Transcribed Image Text:OThe 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 risk
premium 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) A9 year bond?
b) A 2 year bond?
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