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Keys Corporation's 5-year bonds yield 6.50%, and 5-year T-bonds yield 4. The real risk-free rate is r* = 2.5%, the inflation premium for 5 years...

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?

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Solution of 549615_ACC.doc

Question: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...

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