Keys Corporation’s 5-year bonds yield 8.4%, and 5-year T-bon…
Keys Corporation’s 5-year bonds yield 8.4%, and 5-year T-bonds yield 6.6%. The real risk-free rate is r* = 1.8%, the inflation premium for 5 years bonds is IP = 4.4%, the default risk premium for Keys’ bonds is DRP = 0.38% 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?
Read DetailsThe real risk-free rate of interest is 1 percent. Inflation…
The real risk-free rate of interest is 1 percent. Inflation is expected to be 5 percent this coming year, jump to 6 percent next year, and increase to 7 percent the year after (Year 3). According to the expectations theory, what should be the interest rate on 1-year, risk-free securities today?
Read DetailsSuppose the real risk-free rate is 3.6%, the average future…
Suppose the real risk-free rate is 3.6%, the average future inflation rate is 2.3%, a maturity premium of 0.06% per year to maturity applies, i.e., MRP = 0.06%(t), where t is the years to maturity. Suppose also that a liquidity premium of 0.7% and a default risk premium of 0.7% applies to A-rated corporate bonds. How much higher would the rate of return be on a 7-year A-rated corporate bond than on a 5-year Treasury bond. Here we assume that the pure expectations theory is NOT valid.
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