How is default risk different from default risk premium?Describe two ways an investor can evaluate a bond issuer's risk of default.
Default risk tells the inability of the issuer of the funds or borrowers in paying back the debt or principal amount, whereas default risk premium is the top-up or additional interest rate over and above the risk free rate, that comes with the risky bonds. A higher level of risk, means higher value of the default risk premium. In contrast to it, default risk is the risk of not paying back the funds and a higher default risk leads to the higher default risk premium. Further, default risk is a risk, but default risk premium is the reward to take that risk.
The first way to evaluate the risk of default is the assess the credit rating of the bond issuer. The bond issued, can be of investment grade bond or junk bond. Further, bond can be low risk or high risk bond, depending upon the rating given by the reputed rating agencies.
The second way is to evaluate the
risk premium offered on the bond. A higher risk premium upon the
bond, will make bond issuers to pay higher return and it can make
them default on their promise to pay. So, it is also an important
way to assess the default risk of the bond issuers.
How is default risk different from default risk premium?Describe two ways an investor can evaluate a...
31) What is default risk? How is it different from default risk premium? Describe two ways an investor can evaluate a bond issuer’s risk of default. (Please explain in details, the more the better)
Two of the ways that debentures reduce the risk of default a. bond covenants and sinking funds b. bond convenants and debt covenants c. sinking funds and mutual funds
Click here to read the eBook: The Determinants of Market Interest Rates DEFAULT RISK PREMIUM A Treasury bond that matures in 10 years has a yield of 4.25%. A 10-year corporate bond has a yield of 10%. Assume that the liquidity premium on the corporate bond is 0.25%. What is the default risk premium on the corporate bond? Round your answer to two decimal places.
Determinants of Interest Rate for Individual Securities A particular security's default risk premium is 4.90 percent. For all securities, the inflation risk premium is 3.90 percent and the real interest rate is 3.20 percent. The security's liquidity risk premium is 1.70 percent and maturity risk premium is 2.80 percent. The security has no special covenants. What is the security's equilibrium rate of return? Taxable Equivalent Yield What's the taxable equivalent yield on a municipal bond with a yield to maturity...
ment: Module 3 Homework as Problem 6.04 (Default Risk Premium) Save SEME Assement for Grading Check My Work (3 remaining) eBook A Treasury bond that matures in 10 years has a yield of 4.50%. A 10-year corporate bond has a yield of 8.75%. Assume that the liquidity premium on the corporate bond is 0.35%. What is the default risk premium on the corporate bond? Round your answer to two decimal places. Check My Work (3 remaining) Olcon Ky Problem 6.04...
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...
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?
An investor is interested in purchasing a ten year bond. Find the appropriate maturity risk premium. 2.9% 1.9% 1.0% 0.9% The real risk-free rate 2.75% and inflation is expected to be 2.25% for the next 5 years. A corporate bond that matures in 5 years has a yield of 9.75% and a default risk premium of 1.15%. What is the liquidity premium for this security if the maturity risk premium is 1.45%? 3.25% 6.90% 1.25% 2.15% Matthew takes out a...
Select one A the real rate, a default risk premium and expected inflation question B. the real rate, expected inflation and a default risk premium C. expected inflation, a default risk premium and a maturity premium D. the real rate, expected inflation, and a maturity premium. 25 The is the face value of the bond. Select one 0 out of A coupon X B. maturity date question C. coupon tate D. par value 26 Vitmix Industries Inc. is issuing a...
c. Define the terms inflation premium (IP), default risk premium (DRP), liquidity premium (LP), and maturity risk premium (MRP). Which of these premiums is included in determining the interest rate on (1) short-term U.S. Treasury securities, (2) long-term U.S. Treasury securities, (3) short-term corporate securities, and (4) long-term corporate securities? Explain how the premiums would vary over time and among the different securities listed.