ARE143_CHAP_9_2012_KEY-2

85 615 790 175 2 problem 6 keys corporations 5 year

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Unformatted text preview: 0.80% 0.50% 0.85% 6.15% 7.90% 1.75% 2 Problem 6: Keys Corporation's 5-year bonds yield 6.50%, and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5 years bonds is IP = 1.50%, the default risk premium for Keys' bonds is DRP = 0.50% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1)*0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Keys' bonds? Maturity rKeys' Yield rT-bond Yield r* IP DRP MRP LP Included in both bonds Included in both bonds Included in Keys only Included in both bonds (t-1)*0.1% 5 6.50% 4.40% 2.50% 1.50% 0.50% 0.40% 1.60% Problem 7: Keys Corporation's 5-year bonds yield 6.50%, and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the default risk premium for Keys' bonds is DRP = 0.40%, the liquidity premium on Keys' bonds is LP = 1.7% versus zero on T-bonds, and the inflation premium (IP) is 1.5%. What is the maturity risk premium (MRP) on a 5-year bond? Maturity rKeys' Yield rT-bond Yield r* LP DRP IP MRP Included in both bonds Included in Keys only Included in Keys only Included in both bonds (t-1)*0.1% 5 6.50% 4.40% 2.50% 1.70% 0.40% 1.50% 0.40%...
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