Question

Yields for the following corporate bonds are listed in the table below along with their bond...

Yields for the following corporate bonds are listed in the table below along with their bond rating.

Corp.​ bond, Reference​ #

Bond

Rating

Yield

​(% annually)

1

CCC

7.00​%

2

BBB

5.90​%

3

B

6.40​%

4

AA

3.05​%

a. If the yield on a government of Canada bond is

2.50​%,

then the risk premium

LOADING...

on Bond

​#4

is

nothing​%.

​(Round

your response to two decimal

places.​)

b. What is a likely range of yields for a corporate bond with a BB​ rating?  

Must be​ above:

nothing​%

Must be

below​:

nothing​%

​(Round

your responses to two decimal

places.​)

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Homework Answers

Answer #1

a. If the yield on a government of Canada bond is 2.50​%, then the risk premium on Bond ​#4 is:

Risk premium = 3.05 - 2.50 = 0.55%

Correct answer: The risk premium is 0.55% on Bond #4 which has an AA rating.

(The risk premium is with respect to the risk-free rate)

----

b. What is a likely range of yields for a corporate bond with a BB​ rating?

Must be​ above: 5.90%

Must be below​: 6.40%

Correct answer: As the BB bond lies between B bonds and BBB bonds in terms of risk, their yields should be between 5.90% to 6.40%.

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