ARE143_CHAP_9_2012_KEY-2

# 1 and corporate bonds have a 02 liquidity premium

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: l 10-year bonds is 1.1%, and corporate bonds have a 0.2% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond? 5.20% 7.50% 1.10% 0.20% 1.00% T bond yield Corporate yield MRP LP DRP Problem 5: Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.25%, a maturity premium of 0.08% per year to maturity applies, i.e., MRP = 0.08%(t), where t is the years to maturity. Suppose also that a liquidity premium of 0.5% and a default risk premium of 0.85 applies to A-rated corporate bonds. How much higher would the rate of return be on a 10-year A-rated corporate bond than on a 5-year Treasury bond. Here we assume that the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. r* IP MRP, 5-year T-bond MRP, 10-year corporate LP DRP T-bond yield A bond yield Difference Per year: Per year: 0.08% 0.08% Years: Years: 5 10 3.50% 2.25% 0.40%...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online