Question

1. [Inflation and Risk Premiums] Voice River, Inc. provides media-on-demand services via the Internet. Management has...

1. [Inflation and Risk Premiums] Voice River, Inc. provides media-on-demand services via the Internet. Management has been studying current interest rates. A lender is willing to make a two-year loan to Voice River at a 12 percent annual interest rate. The U.S. government is currently paying 8 percent annual interest on its two-year securities.

A.     If the real rate of interest is expected to be 3 percent annually, what is the inflation premium expected at this time?

B.     What is the amount of the total risk premium that Voice River will have to pay?

C.    If a 1 percent liquidity premium is built into the 12 percent rate, what is the default risk premium on the loan?

Business   Accounting   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

1. If the real rate of interest is expected to be 3 percent annually, what is inflation premium expected at this time?

Formula = Risk free Rate = Real rate + Inflation Premium

= 8% - 3% = 5%

2. What is the amount of the total risk premium that Voice River will have to pay?

Formula =nominal interest rate – Risk free Interest rate

= 12% - 8% = 4%

3. If a 1 percent liquidity premium is built into the 12 percent rate, what is the default risk premium on the loan?

Formula: Risk Premium – Liquidity Premium

= 4% - 1% = 3%

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
show all works 1. The real risk-free rate of interest is 1%. Inflation is expected to...
show all works 1. The real risk-free rate of interest is 1%. Inflation is expected to be 4% the next 2 years and 7% during the next 3 years after that. Assume that the maturity risk premium is zero. What is the yield on 3-year Treasury securities? (5 points) 2. The real risk-free rate of interest is 2.5%. Inflation is expected to be 2% the next 2 years and 4% during the next 3 years after that. Assume that the...
Problem 6-17 Interest Rate Premiums A 5-year Treasury bond has a 4.65% yield. A 10-year Treasury...
Problem 6-17 Interest Rate Premiums A 5-year Treasury bond has a 4.65% yield. A 10-year Treasury bond yields 6.1%, and a 10-year corporate bond yields 8.8%. The market expects that inflation will average 2.85% over the next 10 years (IP10 = 2.85%). 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...
A corporation's 10-year bonds are currently yielding a return of 12.25 percent. The expected inflation premium...
A corporation's 10-year bonds are currently yielding a return of 12.25 percent. The expected inflation premium is 2.75 percent annually and the real interest rate is expected to be 3.00 percent annually over the next 10 years. The liquidity risk premium on the corporation's bonds is 0.25 percent. The maturity risk premium is 0.25 percent on two-year securities and increases by 0.25 percent for each additional year to maturity. What is the default risk premium on the corporation's 10-year bonds?...
1. The real risk-free rate is 2.6%. Inflation is expected to be 2.15% this year, 4.15%...
1. The real risk-free rate is 2.6%. Inflation is expected to be 2.15% this year, 4.15% next year, and 2.65% thereafter. The maturity risk premium is estimated to be 0.05 × (t - 1)%, where t = number of years to maturity. What is the yield on a 7-year Treasury note? Do not round your intermediate calculations. Round your answer to two decimal places. 2. A company's 5-year bonds are yielding 9.75% per year. Treasury bonds with the same maturity...
The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected...
The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 3% per year for each of the next three years and 2% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t – 1)%, where t is the security’s maturity. The liquidity premium (LP) on all Rink Machine Co.’s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk...
The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected...
The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 5% per year for each of the next two years and 4% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t – 1)%, where t is the security’s maturity. The liquidity premium (LP) on all Pandar Corp.’s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium...
Question 1.) One-year Treasury securities yield 4.55%. The market anticipates that 1 year from now, 1-year...
Question 1.) One-year Treasury securities yield 4.55%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 5.7%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities? Calculate the yield using a geometric average. Do not round your intermediate calculations. Round your answer to two decimal places. Question 2.) A Treasury bond that matures in 10 years has a yield of 5.25%. A 10-year corporate bond has a yield of...
1.) You are examining treasury securities over a two-year horizon. Assume the annual real risk-free rate...
1.) You are examining treasury securities over a two-year horizon. Assume the annual real risk-free rate of interest (r*) is constant at 2%. The inflation rate is expected to be 3% for next year and 5% the following year. Assume the maturity premium is 2% for a two-year bond. Given these factors, what would be the interest rate on a two-year treasury security? 2.) You just took out a 5-year loan for $10,000 with an annual interest rate of 5%....
Multiple Choice 11. Prepayment risk is: A. the risk you will not receive the cash flows...
Multiple Choice 11. Prepayment risk is: A. the risk you will not receive the cash flows on a mortgage-backed security B. the risk that you will receive the cash flows sooner than expected and be forced to invest at a lower rate. C. the risk that you will receive the cash flows later than expected and not be able to invest at current, higher rates. 12. Based on the video Inside the Meltdown, it appeared that the main reason Lehman...
1. A Treasury bond has a 10% annual coupon and a 10.5% yield to maturity. Which...
1. A Treasury bond has a 10% annual coupon and a 10.5% yield to maturity. Which of the following statements is CORRECT? * a. The bond sells at a price below par. b. The bond has a current yield less than 10%. c. The bond sells at a discount. d. a & c. e. None of the above 2. J&J Company's bonds mature in 10 years, have a par value of $1,000, and make an annual coupon interest payment of...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT