contestada

Suppose the real risk-free rate is 2.75%, the average future inflation rate is 2.25%, a maturity premium of 0.20% per year to maturity applies, i.e., MRP = 0.20%(t), where t is the number of years to maturity. Suppose also that a liquidity premium of 0.50% and a default risk premium of 2.90% applies to A-rated corporate bonds. What is the difference in the yields on a 5-year A-rated corporate bond and on a 10-year Treasury bond? Here we assume that the pure expectations theory is NOT valid, and disregard any cross-product terms, i.e., if averaging is required, use the arithmetic average.

a. 2.40 p.p.
b. 4.34 p.p.
c. 5.30 p.p.
d. 2.90 p.p.
e. 3.40 p.p.

Respuesta :

sakshigupta4990

0.3% is the difference in the yields on a 5-year A-rated corporate bond and on a 10-year Treasury bond.

step1:

calculate the yield on 5-year A=rated bonds

MRP of 5-year bonds  =  0.20% * 5 =  1%

yield on A_rated corporate bond =  r* + IP + MRP + DRP + LP

= 3.5% + 2.5% + 1% + 0.8% + 0.5%

= 8.3%

step2:

calculate the yield on 10-year treasury bonds

MRP on 10-year corporate bond =  0.20% * 10  =  2%

the yield on treasury bond

= r* + IP + MRP

=  3.5% + 2.5% + 2%

= 8%

step3:

calculate difference

difference  =  8.3%  - 8%  =  0.3%.

A corporate bond is a bond issued by a company to raise funds. Investors who buy corporate bonds are effectively lending money to the company in exchange for a series of interest payments, although these bonds may also be actively traded in the secondary market.

Learn more about corporate bonds at

https://brainly.com/question/9817093

#SPJ1

Otras preguntas