Question

D Question 1 1 pts You are estimating the correct rate for a small companys bond with a maturity of 20 years. You estimate the real risk-free rate is 0.4%, the maturity risk premium on a 20 year bond is 1.9%, and the expected average inflation over the 20 years is 2.5%. You estimate the companys default risk premium is 2.9% and due to the expected infrequent trading the liquidity risk premium for the bond is 0.3%. What is the expected rate on the bond? Express in DECIMALS, not %, so 5.22% should be .0522.

0 0
Add a comment Improve this question Transcribed image text
Answer #1

Expected rate of bond = Real risk free rate+ Inflation premium + Maturity risk premium + Default risk premium + Liquidity risk premium

= 0.4%+2.5%+ 1.9%+ 2.9%+ 0.3%

=0.08

Add a comment
Know the answer?
Add Answer to:
D Question 1 1 pts You are estimating the correct rate for a small company's bond...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

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
  • 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.

  • Given the rate information in the table below, estimate the nominal rate for a AA-rated corporate...

    Given the rate information in the table below, estimate the nominal rate for a AA-rated corporate bond. Assume a liquidity premium of 6 basis points. Identify as part of your answer the inflation risk premium, the default risk premium, the maturity premium, and the liquidity premium. 3-month T-bills 4.0% 30-year Treasury Bonds 6.0% AA-rated Corp. Bonds 8.0% Inflation Rate 2.5%

  • A 5-year Treasury bond has a 4.8% yield. A 10-year Treasury bond yields 6.1%, and a...

    A 5-year Treasury bond has a 4.8% yield. A 10-year Treasury bond yields 6.1%, and a 10-year corporate bond yields 9.4%. The market expects that inflation will average 2.9% over the next 10 years (IP10 = 2.9%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities:...

  • The real risk-free rate of interest is expected to remain constant at 2.5%. The inflation rate is...

    The real risk-free rate of interest is expected to remain constant at 2.5%. The inflation rate is expected to be 3% (Year 1), 4.2% (Year 2), and 4.6% thereafter. The maturity risk premium (MRP) is equal to 0.079(t-1)%, where t-the bond's maturity. A 4-year corporate bond yields 8%, what is the yield on a 10-year corporate bond that has the default risk and liquidity premiums 1% higher than that of the 4-year corporate bond? The real risk-free rate of interest...

  • 23. (a) = 4% You are given the following data for a corporate bond in a...

    23. (a) = 4% You are given the following data for a corporate bond in a particular economy: r* = real risk-free rate Inflation premium Maturity risk premium = 1% Default risk premium Liquidity premium = 7% = 3% = 2% Assume that a highly liquid market does not exist for long-term Treasury bonds in that economy, and the expected rate of inflation is constant. Given these conditions find the appropriate rates for a Treasury bill and a long-term Treasury...

  • An investor is interested in purchasing a ten year bond. Find the appropriate maturity risk premium....

    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...

  • Which of the following equations is NOT correct? Quoted rate =  quota risk-free rate + default risk...

    Which of the following equations is NOT correct? Quoted rate =  quota risk-free rate + default risk premium + liquidity premium + maturity risk premium Quoted interest rate minus real risk-free rate = Inflation premium Maturity risk premium + marketability premium = Nominal rate minus quoted risk-free rate Maturity risk premium + marketability premium + default risk premium = Nominal rate minus quoted risk-free rate You are the chief financial officer (CFO) of a regional bank in New Orleans. As you...

  • D Question 1 5 pts Assume that a 3-year Treasury security yields 5.00%. Also assume that...

    D Question 1 5 pts Assume that a 3-year Treasury security yields 5.00%. Also assume that the real risk-free rate rs 0.75%, and inflation is expected to be 2.25% annually for the next 3 years. In addition to inflation, the nominal interest rate also includes a maturity risk premium (MRP) that reflects interest rate risk. What is the maturity risk premium for the 3-year security? Round your answer to two decimal places Your answer should be between 0.00 and 2.92,...

  • 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...

  • Urmar Question 23 1 pts Drongo Corporation's 4-year bonds currently yield 4.1 percent and have an...

    Urmar Question 23 1 pts Drongo Corporation's 4-year bonds currently yield 4.1 percent and have an inflation premium of 1.4%. The real risk-free rate of interest, r', is 1.4 percent and is assumed to be constant. The maturity risk premium (MRP) is estimated to be 0.1%(t-1), where t is equal to the time to maturity. The default risk and liquidity premiums for this company's bonds total 1 percent and are believed to be the same for all bonds issued by...

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