Question

What is the default risk premium?

A.The additional yield that an investor requires for holding a bond with some default risk.

B.The yield that an investor requires for holding a bond during the time of a recession.

C.The return that an investment is expected to yield.

D.The theoretical rate of return of an investment with zero risk.

Answer #1

Option A is correct.

All securities that exist in the financial Market has many risks attached to it. One of the risk is Default Risk. Defualt Risk is the the risk that the issuer of security will not be able to pay back the money and he will default the scheduled payment. The investor requires the premium on takingn such risks, called Defualt Risk Premium.

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Assume that the real interest rate is 2%, the default risk
premium is 3%, the liquidity premium is 1%, and the maturity risk
premium is 1% per year. Additionally, the expected inflation rate
is 2% next year, 5% the year after, and 3% from then on. What are
the nominal interest rates for: a) (5 pts) 1-year note? b) (5 pts)
5-year bond? c) (5 pts) Does this produce an inverted yield curve?
Why or why not?

Based on Table 7, what is the default risk premium?
Investment
Maturity
Liquidity
Default Risk
Interest Rate
1
2
High
Low
3.00%
2
2
Low
Low
3.72
3
7
Low
Low
4.72
4
8
High
Low
5.54
5
8
Low
High
7.04
Table 7
A. 0.78%
B. 0.82%
C. 1.50%
D. 0.72%

Assume that the real risk-free rate is 2% and that the maturity
risk premium is zero. If a 1-year Treasury bond yield is 6% and a
2-year Treasury bond yields 10%, what is the 1-year interest rate
that is expected for Year 2? Calculate this yield using a geometric
average. Do not round intermediate calculations. Round your answer
to two decimal places. % What inflation rate is expected during
Year 2? Do not round intermediate calculations. Round your answer
to...

Assume that the real risk-free rate is 1% and that the maturity
risk premium is zero. If a 1-year Treasury bond yield is 5% and a
2-year Treasury bond yields 6%, what is the 1-year interest rate
that is expected for Year 2? Calculate this yield using a geometric
average. Do not round intermediate calculations. Round your answer
to two decimal places.
%
What inflation rate is expected during Year 2? Do not round
intermediate calculations. Round your answer to...

Assume that the real risk-free rate is 1.8% and that the
maturity risk premium is zero. If a 1-year Treasury bond yield is
6% and a 2-year Treasury bond yields 6.5%. Calculate the yield
using a geometric average.
What is the 1-year interest rate that is expected for Year 2?
Do not round intermediate calculations. Round your answer to two
decimal places.
%
What inflation rate is expected during Year 2? Do not round
intermediate calculations. Round your answer to...

1. Assume that the real risk-free rate is 2.2% and that the
maturity risk premium is zero. If a 1-year Treasury bond yield is
6.6% and a 2-year Treasury bond yields 6.8%. Calculate the yield
using a geometric average.
a. What is the 1-year interest rate that is expected for Year 2?
Do not round intermediate calculations. Round your answer to two
decimal places.
b. What inflation rate is expected during Year 2? Do not round
intermediate calculations. Round your...

Assume that the real risk-free rate is 1.5% and that the
maturity risk premium is zero. If a 1-year Treasury bond yield is
6.4% and a 2-year Treasury bond yields 6.7%. Calculate the yield
using a geometric average.
What is the 1-year interest rate that is expected for Year 2? Do
not round intermediate calculations. Round your answer to two
decimal places.
%
What inflation rate is expected during Year 2? Do not round
intermediate calculations. Round your answer to...

Assume that the real risk-free rate is 2.4% and that the
maturity risk premium is zero. If a 1-year Treasury bond yield is
5.8% and a 2-year Treasury bond yields 6.4%. Calculate the yield
using a geometric average.
What is the 1-year interest rate that is expected for Year 2? Do
not round intermediate calculations. Round your answer to two
decimal places.
What inflation rate is expected during Year 2? Do not round
intermediate calculations. Round your answer to two...

1.Assume that the real risk-free rate is 1.6% and that the
maturity risk premium is zero. If a 1-year Treasury bond yield is
5.8% and a 2-year Treasury bond yields 6.4%. Calculate the yield
using a geometric average.
A.What is the 1-year interest rate that is expected for Year 2?
Do not round intermediate calculations. Round your answer to two
decimal places.
B.What inflation rate is expected during Year 2? Do not round
intermediate calculations. Round your answer to two...

Problem 6-25
Suppose you purchase a
30-year, zero-coupon bond with a yield to maturity of 6%. You hold
the bond for five years before selling it. Note: assume $100 face
value.
a.
If the bond’s yield to
maturity is 6% when you sell it, what is the annualized rate of
return of your investment?
b.
If the bond’s yield to
maturity is 7% when you sell it, what is the annualized rate of
return of your investment?
c.
If the...

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