Question

6. At present, 20-year Treasury bonds are yielding 4.9% while some 20-year corporate bonds that you are interested in are yielding 9.2 %. Assuming that the maturity-risk premium on both bonds is the same and that the liquidity-risk premium on the corporate bonds is 0.29% while it is 0.0% on the Treasury bonds, what is the default-risk premium on the corporate bonds? Note that a Treasury security should have no default-risk premium. (Sp) Answer: 7. If the 10-year Treasury bond rate is 5.3 %, the inflation premium is 2.6 %, and the maturity risk premium on 10-year Treasury bonds is 0.6 %, assuming that there is no liquidity risk premium on these bonds, what is the real risk-free interest rate? (5p) Answer: (4p) 8. In principle, the numbers for an asset on a Balance Sheet represents; A. the offering value of the asset B. the estimated value of the asset C. the expected market value of the asset D. the least acceptable value of the asset E. the historic cost of the asset (4p) 9. An Income Statement is prepared A. For a certain date and with payment basis B. For a certain date and with accrual basis C. For a period and with payment basis D. For a period and with accrual basis E. For a period and with certainty basis

answer what you know ! its short question

Answer 1

6) Default Risk-Preumium

The default risk premium of the bonds = Return on Bonds - Risk free return (Treasury) - Liquidity risk premium

= 9.2% - 4.9% - 0.29%

= 4.01%

7) Real Risk-free return

Real Risk-free return = Risk-free rate - Inflation premium - Maturity risk premium

= 5.3% - 2.6% - 0.6%

= 2.1%

8) In principle, the numbers of the balance sheet represent the historic cost of the asset. However, in some cases, assets are valued at fair value.

9) Option D : Income statement is prepared for a period with Accrual basis.