EBK CFIN
EBK CFIN
6th Edition
ISBN: 9781337671743
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 5, Problem 18PROB
Summary Introduction

Yield:

Yield is the return to be earned from an investment, if hold it for a specific period.

Yield includes payment of interest or dividend but does not include capital appreciation.

Calculate the yield as follows:

Yield=(Nominal risk free rate+Liquidity premium+Maturity risk premium+Default risk premium)

Given six months Treasury bill yield is 3.2%. Company F bonds matures in three years and yield is 5% and 7 years bonds yield is 5.8%. Bonds does not have liquidity premium.

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Currently, a one-year Treasury bill is yielding 3.8 percent. Company F's three-year bond has a yield equal to 5.1 percent, and its seven-year bond has a yield equal to 5.9 percent. Although none of the bonds has a liquidity premium, any bond with a maturity equal to one year or longer has a maturity risk premium (MRP). Except for their terms to maturity, the characteristics of the bonds are the same. Compute the annual MRP associated with the bonds. Round your answer to one decimal place.   % Compute the default risk premium (DRP) associated with the bonds. Round your answer to one decimal place.   %
Consider an A-rated bond and a B-rated bond. Assume that the one-year probabilities of default for the A- and B-rated bonds are 1% and 3%, respectively, and that default correlation between the two bonds is 20%. What is the joint probability of default of the two bonds?
Compute for the following given statement and justify your answer.   Consider two bonds. Bond X has a face value of ₱100,000 and five years remaining to maturity. BondY has a face value of ₱100,000 and ten years remaining to maturity. Both bonds have the same statedrate of 12%. Which bond has the greatest interest rate risk?
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