2010-05-24_051734_Rollincoast - 7.8%, then at what rate...

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Rollincoast Incorporated issued BBB bonds two years ago that provided a yield to maturity of 11.5%. Long-term risk-free government bonds were yielding 8.7% at that time. The current risk premium on BBB bonds versus government bonds is half of what it was two years ago. If the risk-free long-term government bonds are currently yielding
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Unformatted text preview: 7.8%, then at what rate should Rollincoast expect to issue new bonds? Calculate the previous risk premium, RP BBB , and new RP BBB : RP BBB = 11.5% - 8.7% = 2.8%. New RP BBB = 2.8%/2 = 1.4%. Calculate new YTM on BBB bonds: YTM BBB = 7.8% + 1.4% = 9.2%....
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