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(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...


(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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8410190.xlsx

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...

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