Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Question
Chapter 6, Problem 17P
Summary Introduction
To identify: The expected yield on 5-year Treasury bond.
Introduction:
Yield:
The yield is the percentage of the securities at which the return is provided by the company to its investors. Yield can be used in the form of dividend and interest.
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A 5-year Treasury bond has a 4.15% yield. A 10-year Treasury bond yields 6%, and a 10-year corporate bond yields 8.6%. The market expects that inflation will average 1.95% over the next 10 years (IP10 = 1.95%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP = LP = 0.) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.
What is the yield on this 5-year corporate bond? Round your answer to two decimal places.
INFLATION AND INTEREST RATES The real risk-free rate of interest, r*, is 3%, and it is expected to remain constant over time. Inflation is expected to be 2% per year for the next 3 years and 4% per year for the next 5 years. The maturity risk premium is equal to 0.1 X (t - 1)%, where t = the bond’s maturity. The default risk premium for a BBB-rated bond is 1.3%.
What is the yield on an 8-year Treasury bond?
What is the yield on an 8-year BBB-rated corporate bond with a liquidity premium of 0.5%?
If the yield on a 9-year Treasury bond is 7.3%, what does that imply about expected inflation in 9 years?
A 5-year Treasury bond has a 3.4% yield. A 10-year Treasury bond yields 6.1%, and a 10-year corporate bond yields 8.7%. The market
expects that inflation will average 3.9% over the next 10 years (IP10 = 3.9%). Assume that there is no maturity risk premium (MRP = 0)
and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and
the liquidity premium are zero for Treasury securities: DRP = LP = 0.) A 5-year corporate bond has the same default risk premium and
liquidity premium as the 10-year corporate bond described. The data has been collected in the Microsoft Excel Online file below. Open the
spreadsheet and perform the required analysis to answer the question below.
What is the yield on this 5-year corporate bond? Round your answer to two decimal places.
%
Chapter 6 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 6 - Prob. 1QCh. 6 - Prob. 2QCh. 6 - Suppose you believe that the economy is just...Ch. 6 - Prob. 4QCh. 6 - Suppose a new process was developed that could be...Ch. 6 - Prob. 6QCh. 6 - Prob. 7QCh. 6 - Suppose interest rates on Treasury bonds rose from...Ch. 6 - Prob. 9QCh. 6 - Suppose you have noticed that the slope of the...
Ch. 6 - YIELD CURVES Assume that yields on U.S. Treasury...Ch. 6 - Prob. 2PCh. 6 - Prob. 3PCh. 6 - DEFAULT RISK PREMIUM A Treasury bond that matures...Ch. 6 - MATURITY RISK PREMIUM The real risk-free rate is...Ch. 6 - INFLATION CROSS-PRODUCT An analyst is evaluating...Ch. 6 - EXPECTATIONS THEORY One-year Treasury securities...Ch. 6 - EXPECTATIONS THEORY Interest rates on 4-year...Ch. 6 - EXPECTED INTEREST RATE The real risk-free rate is...Ch. 6 - INFLATION Due to a recession, expected inflation...Ch. 6 - DEFAULT RISK PREMIUM A companys 5-year bonds are...Ch. 6 - Prob. 12PCh. 6 - Prob. 13PCh. 6 - Prob. 14PCh. 6 - EXPECTATIONS THEORY Assume that the real risk-free...Ch. 6 - INFLATION CROSS-PRODUCT An analyst is evaluating...Ch. 6 - Prob. 17PCh. 6 - YIELD CURVES Suppose the inflation rate is...Ch. 6 - Prob. 19PCh. 6 - INTEREST RATE DETERMINATION AND YIELD CURVES a....Ch. 6 - Prob. 21IC
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