(5–4)

Determinant of

Interest Rates The real risk-free rate of interest is 4%. Inflation is expected to be 2% this year and

4% during the next 2 years. Assume that the maturity risk premium is zero. What is

the yield on 2-year Treasury securities? What is the yield on 3-year Treasury

securities?

(5–5)

Default Risk Premium A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate

bond has a yield of 9%. Assume that the liquidity premium on the corporate bond is

0.5%. What is the default risk premium on the corporate bond?

(5–6)

Maturity Risk Premium The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years.

A 2-year Treasury security yields 6.3%. What is the maturity risk premium for the

2-year security?

(5–7)

Bond Valuation with

Semiannual Payments Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually.

The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of

8.5%. What is the price of the bonds?

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