Question

A company's 5-year bonds are yielding 7% per year. Treasury bonds with the same maturity are...

A company's 5-year bonds are yielding 7% per year. Treasury bonds with the same maturity are yielding 4.75% per year, and the real risk-free rate (r*) is 2.30%. The average inflation premium is 2.05%, and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = number of years to maturity. If the liquidity premium is 0.75%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Corporate Bond Yield = 7.00%
T-Bond Yield = 4.75%
Real Risk-free Rate = 2.30%
Inflation Premium = 2.05%
Liquidity Premium = 0.75%

Maturity Risk Premium = 0.1 * (t - 1)%, here t = 5
Maturity Risk Premium = 0.1 * (5 - 1)%
Maturity Risk Premium = 0.40%

Corporate Bond Yield = Real Risk-free Rate + Inflation Premium + Liquidity Premium + Maturity Risk Premium + Default Risk Premium
7.00% = 2.30% + 2.05% + 0.75% + 0.40% + Default Risk Premium
7.00% = 5.50% + Default Risk Premium
Default Risk Premium = 1.50%

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
A company's 5-year bonds are yielding 9.95% per year. Treasury bonds with the same maturity are...
A company's 5-year bonds are yielding 9.95% per year. Treasury bonds with the same maturity are yielding 5.45% per year, and the real risk-free rate (r*) is 3%. The average inflation premium is 2.05%, and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = number of years to maturity. If the liquidity premium is 0.5%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
A company's 5-year bonds are yielding 9.95% per year. Treasury bonds with the same maturity are...
A company's 5-year bonds are yielding 9.95% per year. Treasury bonds with the same maturity are yielding 5.45% per year, and the real risk-free rate (r*) is 3%. The average inflation premium is 2.05%, and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = number of years to maturity. If the liquidity premium is 0.5%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
A company's 5-year bonds are yielding 9.45% per year. Treasury bonds with the same maturity are...
A company's 5-year bonds are yielding 9.45% per year. Treasury bonds with the same maturity are yielding 5.85% per year, and the real risk-free rate (r*) is 2.05%. The average inflation premium is 3.40%, and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = number of years to maturity. If the liquidity premium is 0.65%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
A company's 5-year bonds are yielding 9.9% per year. Treasury bonds with the same maturity are...
A company's 5-year bonds are yielding 9.9% per year. Treasury bonds with the same maturity are yielding 5.25% per year, and the real risk-free rate (r*) is 2.00%. The average inflation premium is 2.85%, and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = number of years to maturity. If the liquidity premium is 1.25%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
A company's 5-year bonds are yielding 9.3% per year. Treasury bonds with the same maturity are...
A company's 5-year bonds are yielding 9.3% per year. Treasury bonds with the same maturity are yielding 4.65% per year, and the real risk-free rate (r*) is 2.25%. The average inflation premium is 2.00%, and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = number of years to maturity. If the liquidity premium is 1.45%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
eBook A company's 5-year bonds are yielding 7.85% per year. Treasury bonds with the same maturity...
eBook A company's 5-year bonds are yielding 7.85% per year. Treasury bonds with the same maturity are yielding 5.9% per year, and the real risk-free rate (r*) is 2.45%. The average inflation premium is 3.05%, and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = number of years to maturity. If the liquidity premium is 1.05%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
6-11. Default Risk Premium A company’s 5-year bonds are yielding 7.75% per year. Treasury bonds with...
6-11. Default Risk Premium A company’s 5-year bonds are yielding 7.75% per year. Treasury bonds with the same maturity are yielding 5.2% per year, and the real-risk free rate (r*) is 2.3%. The average inflation premium is 2.5%; and the maturity risk premium is estimated to be 0.1 x (t-1) %, where t = number of years to maturity? If the liquidity premium is 1%, what is the default risk premium on the corporate bonds?
The 5-year bonds of Cartwright Enterprises are yielding 7.75 percent per year. Treasury bonds with the...
The 5-year bonds of Cartwright Enterprises are yielding 7.75 percent per year. Treasury bonds with the same maturity are yielding 5.2 percent per year. The real risk-free rate (k*) has not changed in recent years and is 2.3 percent. The average inflation premium is 2.5 percent and the maturity risk premium takes the form; MRP = 0.1% (t-1), where t = number of years to maturity. If the liquidity premium is 1 percent, what is the default risk premium on...
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 Gran Group's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rate...
The Gran Group's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 2.80%, the default risk premium for Gran's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Gran's bonds is LP = 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t ? 1) × 0.1%, where t = number of years to maturity. What is the inflation premium (IP) on...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT