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KIC000030 - Explaining Actual Yield Differentials(cont'd I...

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Unformatted text preview: Explaining Actual Yield Differentials (cont'd) I Yield diflerentiala of capital market securities nMuniebalbondahevemetoweotbefore—Myield - Ainrmwdd ammmurmuym Emmahavethelweetyleld - Nader-urinal: IMW Dimeetoraprefermuniclpalorcorpomtebondsover Treasury bonds only lithe alter-tax yield campematufordefault risk and lower liquidity ‘mrgi :r ESfimafing the Approwiate Yield I The yield on a debt security is based on the risk-free rate with adjustment to capture various characteristics: YH=RM+DP+LP+TA+GALLP+COND II Maturity is controlled for by matching the - maturity at the risk-free secun‘ty to that of the security of concern Computing the Appropriate Yield A company wants m issue too-daycommercial paper. Six- montt-iT-bille wrrenttyhaveayieldoripercem. Assume theta default risk premium of 0.8 percent, a liquidity premium of 0.1 percent, and a 0.2 pementtax adjustment are neoessaryto sell the commercial paper to investors. What is the appropriate yield the company shouldetteron in commercial paper? Y_ = R,__ +DP+LP+TA+CAILP+COND = Tin +53 1’,‘ 422 5‘5..le ...
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