ARE143_CHAP_9_2012_KEY-2

1 and corporate bonds have a 02 liquidity premium

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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%...
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