week6 - IP=3% 6.30% = r* + MRP + LP i= 6.3% 6.30% = 3% +...

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5.2 n fv pmnt pv i 12 1000 100 -850 12.48% 5.3 n fv pmnt pv i 7 1000 90 ($1,052.06) 8% current yeild 8.55% 5.4 r* = 4%; I1 = 2%; I2 = 4%; I3 = 4%; MRP = 0; rT-2 = ? r = r* + IP + DRP + LP + MRP. Since these are Treasury securities, DRP = LP = 0. rT-2 = r* + IP2 IP2 = (2% + 4%)/2 = 3% rT-2 = 4% + 3% = 7%. rT-3 = r* + IP3 IP3 = (2% + 4% + 4%)/3 = 3.33% rT-3 = 4% + 3.33% = 7.33%. 2 3 r*: risk free rate of interest 4% 4% inlaftion IP 3% 3.33% default risk premium 0% 0% liquidity premium 0% 0% marturity risk premium 0% 0% current yeild 7% 7.333% 5.5 n i LP Tbond 10 6% r = r* + IP + DRP + LP + MRP. Cbond 10 9% 0.50% r = r* + IP + DRP + LP + MRP.
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Because both bonds are 10-year bonds the inflation premium and maturity risk premium on both b r*= 3% r = r* + IP + DRP + LP + MRP.
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Unformatted text preview: IP=3% 6.30% = r* + MRP + LP i= 6.3% 6.30% = 3% + MRP + 3% MRP ? 0.30% n i pmnt fv pv 8 8.50% 100 1000 ($1,085.80) 20 6.62% 40 1000-1100 5 3.24% 40 1050-1100 6.49% L 15 5% 100 1000 ($1,518.98) S 1 5% 100 1000 ($1,047.62) 15 8% 100 1000 ($1,171.19) 1 8% 100 1000 ($1,018.52) 15 12% 100 1000 ($863.78) 1 12% 100 1000 ($982.14) ?; rT-3 = ? Default Risk Prem Liquidity Premium marturity risk premium 6% = r* + IP + DRP + MRP + LP (Tbond LP=0, DRP= 0r*= 6% 9% = r* + IP + DRP + MRP + 0.50% 9% = r* + DRP 0.50% 2.500% bonds are equal. The only difference between them is the liquidity and default risk premiums....
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week6 - IP=3% 6.30% = r* + MRP + LP i= 6.3% 6.30% = 3% +...

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