bus 320 bond & interest rate questions

# bus 320 bond & interest rate questions - maturity yield...

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1. Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 3.05%. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is valid? 2. Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.25%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid? 3. Keys Corporation's 5-year bonds yield 6.50%, and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5 years bonds is IP = 1.50%, the liquidity premium for Keys' bonds is LP = 0.5% versus zero for T-bonds, 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 default risk premium (DRP) on Keys' bonds? 4. Keys Corporation's 5-year bonds yield 6.50%, and T-bonds with the same

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Unformatted text preview: maturity yield 4.40%. The default risk premium for Keys' bonds is DRP = 0.40%, the liquidity premium on Keys' bonds is LP = 1.70% versus zero on T-bonds, inflation premium (IP) is 1.5%, and the maturity risk premium (MRP) on 5-year bonds is 0.40%. What is the real risk-free rate, r*? 5. Consider a bond which pays 7% semiannually and has 8 years to maturity. The market requires an interest rate of 8% on bonds of this risk. What is this bond’s price? 6. The value of a 20 year zero coupon bond when the market required rate of return of 9% (semiannual) is: 7. Yest Corporation's bonds have a 15-year maturity, a 7% coupon (paid semiannually), and a par value of \$1,000. The market interest rate (r d ) is 6%, based on semiannual compounding. What is the bond’s price? 8. Brown Enterprises’ bonds currently sell for \$1,025. They have a 9-year maturity, an annual coupon of \$80, and a par value of \$1,000. What is their current yield?...
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