Question

eterminants of Interest Rate for Individual Securities You are considering an investment in 30-year bonds issued...

eterminants of Interest Rate for Individual Securities You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.80 percent. Your broker has determined the following information about economic activity and the corporation bonds:

Real interest rate = 3.40%
Default risk premium = 3.55%
Liquidity risk premium = 1.60%
Maturity risk premium = 3.30%

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

The interest rate or yield for this bond could be determined by calculating total risk premium over the Risk free Rate.

Total Risk premium = Liquidity Risk Premium + Maturity Risk Premium + Default Risk Premium

Liquidity risk premium is for the risk of not being convertible into cash for its fair market value

Maturity risk premium is for risk of lending money for longer time

Default risk premium is for risk of default from the issuer of bond.

Total risk premium = 1.60% + 3.30% + 3.55% = 8.45%

Expected Bond Yield = Risk ree rate + Risk premiums = 3.80% + 8.45% = 12.25%

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
Determinants of Interest Rate for Individual Securities You are considering an investment in 30-year bonds issued...
Determinants of Interest Rate for Individual Securities You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.80 percent. Your broker has determined the following information about economic activity and the corporation bonds: Real interest rate = 3.15% Default risk premium = 3.05% Liquidity risk premium = 1.35% Maturity risk premium = 2.80% What is the inflation premium? What is the...
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no...
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.55 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real risk-free rate = 0.45% Default risk premium = 1.45% Liquidity risk premium = 1.10% Maturity risk premium = 2.05% What is the inflation Premium? (Round your answer to 2 decimal places.) Expected IP______% What...
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no...
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that one-year T-bills are currently earning 0.50 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:   Real risk-free rate = 0.42%   Default risk premium = 1.15%   Liquidity risk premium = 0.60%   Maturity risk premium = 0.95% a. What is the inflation premium? (Round your answer to 2 decimal places. (e.g., 32.16))...
Determinants of Interest Rate for Individual Securities The Wall Street Journal reports that the rate on...
Determinants of Interest Rate for Individual Securities The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.90 percent, and the 6-year Treasury rate is 8.15 percent. From discussions with your broker, you have determined that expected inflation premium is 3.40 percent next year, 3.65 percent in Year 2, and 3.85 percent in Year 3 and beyond. Further, you expect that real interest rates will be 3.95 percent annually for the foreseeable future. What is the maturity...
A corporation's 20-year bonds have an equilibrium rate of return of 9.00 percent. For all securities,...
A corporation's 20-year bonds have an equilibrium rate of return of 9.00 percent. For all securities, the inflation risk premium is 1.66 percent and the real interest rate is 3.41 percent. The security's liquidity risk premium is .46 percent and maturity risk premium is .91 percent. The security has no special covenants. What is the bond's default risk premium? (Round your answer to 2 decimal places. Do not include a percentage sign.)
Determinants of Interest Rates for Individual Securities The Wall Street Journal reports that the current rate...
Determinants of Interest Rates for Individual Securities The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 3.25 percent and on 20-year Treasury bonds is 5.50 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 10-year Treasury bond purchased ten years from today, E(10r10).
You read in The Wall Street Journal that 30-day T-bills are currently yielding 0.5%. Your brother-in-law,...
You read in The Wall Street Journal that 30-day T-bills are currently yielding 0.5%. Your brother-in-law, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums on a 1 year bond: Liquidity premium = 0.5%. Maturity risk premium = 0.5%. Default risk premium = 1%. On the basis of these data, what is the short term corporate bond rate?
You read in The Wall Street Journal that 30-day T-bills are currently yielding 4.9%. Your brother-in-law,...
You read in The Wall Street Journal that 30-day T-bills are currently yielding 4.9%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums: Inflation premium = 2.50% Liquidity premium = 0.4% Maturity risk premium = 1.55% Default risk premium = 2.00% On the basis of these data, what is the real risk-free rate of return? Round your answer to two decimal places.   %
The Wall Street Journal reports that the rate on three-year Treasury securities is 2.53 percent and...
The Wall Street Journal reports that the rate on three-year Treasury securities is 2.53 percent and the rate on four-year Treasury securities is 2.74 percent. The one-year interest rate expected in three years, E(4r1), is 3.22 percent. According to the liquidity premium hypotheses, what is the liquidity premium on the four-year Treasury security, L4?
1- A particular security’s equilibrium rate of return is 8 percent. For all securities, the inflation...
1- A particular security’s equilibrium rate of return is 8 percent. For all securities, the inflation risk premium is 3.35 percent and the real risk-free rate is 2.2 percent. The security’s liquidity risk premium is 0.55 percent and maturity risk premium is 0.85 percent. The security has no special covenants. Calculate the security’s default risk premium. (Round your answer to 2 decimal places. (e.g., 32.16)) Default risk premium % 2- Suppose we observe the following rates: 1R1 = 5.2%, 1R2...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT