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**Unformatted text preview: **ee points in time noted.
Yield
Time to maturity (years) 5 years ago 2 years ago Today 1 9.1% 14.6% 9.3% 3 9.2 12.8 9.8 5 9.3 12.2 10.9 10 9.5 10.9 12.6 15 9.4 10.7 12.7 20 9.3 10.5 12.9 30 9.4 10.5 13.5 a. On the same set of axes, draw the yield curve at each of the three given times.
b. Label each curve in part a with its general shape (downward-sloping,
upward-sloping, flat).
c. Describe the general inflationary and interest rate expectation existing at
each of the three times.
LG1 6–8 Risk-free rate and risk premiums The real rate of interest is currently 3%; the
inflation expectation and risk premiums for a number of securities follow. Security Inflation expectation
premium Risk premium A 6% 3% B 9 2 C 8 2 D 5 4 E 11 1 a. Find the risk-free rate of interest, RF , that is applicable to each security.
b. Although not noted, what factor must be the cause of the differing risk-free
rates found in part a?
c. Find the nominal rate of interest for each security.
LG1 6–9 Risk premiums Eleanor Burns is attempting to find the nominal rate of interest
for each of two securities—A and B—issued by different firms at the same point
in time. She has gathered the following data: CHAPTER 6 Interest Rates and Bond Valuation Characteristic Security A Security B Time to maturity 3 years 15 years Inflation expectation premium 9.0% 7.0% Liquidity risk 1.0% 1.0% Default risk 1.0% 299 2.0% Risk premium for: Maturity risk 0.5% 1.5% Other risk 0.5% 1.5% a. If the real rate of interest is currently 2%, find the risk-free rate of interest
applicable to each security.
b. Find the total risk premium attributable to each security’s issuer and issue
characteristics.
c. Calculate the nominal rate of interest for each security. Compare and discuss
your findings.
LG2 6–10 Bond interest payments before and after taxes Charter Corp. has issued 2,500
debentures with a total principal value of $2,500,000. The bonds have a coupon
interest rate of 7%.
a. What dollar amount of interest per bo...

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