ZuoTi.Pro
Question

Assume that the average real interest rate is 2%, the default risk premium is 3%, the liquidity premium is 1%, and the maturity risk premium is 2%. Additionally, expected inflation is 2% next year, 5% the year after, and 396 from then on. What is the nominal interest rate for a 10-year bond?
business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

1+Nominal Rate=(1+real rate)*(1+inflation premium)*(1+liquidity premium)*(1+maturity premium)*(1+default premium)

Inflation premium=3%

real rate=2%

liquidity =1%

default premium=3%

1+nominal rate=1.02*1.03*1.01*1.02*1.03
1+nominal rate=1.1148

Nominal rate =0.1148 or 11.48%

0 0
Add a comment
Know the answer?
Add Answer to:
Assume that the average real interest rate is 2%, the default risk premium is 3%, the...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Assume that the real interest rate is 2%, the default risk premium is 3%, the liquidity...

    Assume that the real interest rate is 2%, the default risk premium is 3%, the liquidity premium is 1%, and the maturity risk premium is 1% per year. Additional, the expected inflation rate is 3% next year, 1% the year after, and 10% from then on. What are the nominal interest rates for: a) 1-year note? b) 5-year note? c) does this produce an inverted yield curve? Why or why not? Please show all work!

  • Click here to read the eBook: The Determinants of Market Interest Rates DEFAULT RISK PREMIUM The...

    Click here to read the eBook: The Determinants of Market Interest Rates DEFAULT RISK PREMIUM The real risk free rate, r*, is 2.6%. Inflation is expected to average 3.15% a year for the next 4 years, after which time inflation is expected to average 4.25% a year. Assume that there is no maturity risk premium. An 11-year corporate bond has a yield of 8.5%, which includes a liquidity premium of 0.6%. What is its default risk premium? Do not round...

  • The real risk-free rate of interest, is 3%, and it is expected to remain constant over...

    The real risk-free rate of interest, is 3%, and it is expected to remain constant over time. Inflation is expected to be 2% per year for the next 3 years and 4% per year for the next 5 years. The maturity risk premium is equal to 0.1 x (t-1) %, where t = the bond’s maturity. The default risk premium for a BBB-rated bond is 1.3%. a- What is the average expected inflation rate over the next 4 years? b-What...

  • Assume that the real risk-free rate is 2% and that the maturity risk premium is zero....

    Assume that the real risk-free rate is 2% and that the maturity risk premium is zero. If a 1-year Treasury bond yield is 5% and a 2-year Treasury bond yields 8%, what is the 1-year interest rate that is expected for Year 2? Calculate this yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places. % What inflation rate is expected during Year 2? Do not round intermediate calculations. Round your answer to...

  • The real risk-free rate, r*, is 3%. Inflation is expected to average 2.75% a year for...

    The real risk-free rate, r*, is 3%. Inflation is expected to average 2.75% a year for the next 4 years, after which time inflation is expected to average 4.05% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 9.15%, which includes a liquidity premium of 0.8%. What is its default risk premium? Do not round intermediate calculations. Round your answer to two decimal places.

  • The real risk-free rate is 0.25%. Inflation is expected to average 1.0% a year for the...

    The real risk-free rate is 0.25%. Inflation is expected to average 1.0% a year for the next 2 years, after which time inflation is expected to average 2.00% a year. Assume that there is no maturity risk premium. A 16-year corporate bond has a yield of 16.0%, which includes a liquidity premium of 0.50%. What is its default risk premium? 13.875% 14.250% 13.375% 13.250%

  • 1) Assume that a 3-year treasury security yields 4.10%. Also assume that the real risk-free rate...

    1) Assume that a 3-year treasury security yields 4.10%. Also assume that the real risk-free rate (r*) is 0.75% and inflation is expected to be 2.25% annually for the next 3 years. In addition to inflation, the nominal insterest rate includes a maturity risk premium (MRP) that reflects interest rate risk. What is the maturity risk premium for the 3-year security? Round answer to two decimal places. 2) a treasury bond that matures in 10 years has a yield of...

  • The real risk-free rate, r*, is 1.5%. Inflation is expected to average 1.2% a year for...

    The real risk-free rate, r*, is 1.5%. Inflation is expected to average 1.2% a year for the next 4 years, after which time inflation is expected to average 4.3% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 9.5%, which includes a liquidity premium of 0.7%. What is its default risk premium? Do not round intermediate calculations. Round your answer to two decimal places. %

  • The real risk-free rate, r*, is 1.95%. Inflation is expected to average 2.9% a year for...

    The real risk-free rate, r*, is 1.95%. Inflation is expected to average 2.9% a year for the next 4 years, after which time inflation is expected to average 3.75% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 8.95%, which includes a liquidity premium of 0.9%. What is its default risk premium? Do not round intermediate calculations. Round your answer to two decimal places.

  • The real risk-free rate, r*, is 1.8%. Inflation is expected to average 3.5% a year for...

    The real risk-free rate, r*, is 1.8%. Inflation is expected to average 3.5% a year for the next 4 years, after which time inflation is expected to average 4.65% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 9.15%, which includes a liquidity premium of 0.9%. What is its default risk premium? Do not round intermediate calculations. Round your answer to two decimal places.

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT