Question

a) THIS IS TRUE b) THIS IS FALSE 2. Johnson Corporation's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* 2.80%, the default risk premium for Johnson's bonds is DRPs 0.85% versus zero for T-bonds, the liquidity premium on Johnson's bonds is LP 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t-1) x 0.1%, where t = number of years to maturity, what is the inflation premium (IP) on 5-year bonds? 3. Casby Corporation's 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* 2.75%, the inflation premium for 5-year bonds is IP-1.65%, the default risk premium for Casby Corporation's bonds is DRP-1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP (t-1)x0.1%, where t-number of years to maturity, what is the liquidity premium (LP) on Casby's bonds? a. 0.49% b. 0.55% c. 0.61% d. 0.68% e. 0.75% 4. Suppose the interest rate on a 2-year T-bond is 6.0% and that on a 3-year T-bond is 6.2% and that on a 4-year T-bond is 6.4% Assuming the pure expectations theory is correct, what is the market's forecast for 2-year rates, 2 year from now (forward rate r:4? at are both the four micro factors and the four macro factors which affect the level of interest rates? Explain.

Can you please help me solve these problems. The subject is Principles of Finances Chapter 6 Interest Rates.

Answer 1

1.

=4.75%-2.80%-(5-1)*0.1%

=1.55%

2.

=6.75%-4.80%-1.20%

=0.75%

Option E

3.

=((1+6.4%)^4/(1+6%)^2)^(1/2)-1

=6.8015%

4.

Liquidity

Bank size

Capital Adequcy

Market power

Inflation

Gross Domestic product