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The maturity risk premium for Vonda bonds are 3%, default risk premium for Vonda bonds are 4%, and the liquidity risk premium for Vonda bonds are 2%. The real
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- Assume the real risk-free is 1% and the average annual expected inflation rate is 4%. The DRP and LP for bond A are each 3%, and the applicable MRP is 3%. What is Bond A's interest rate?Assume that the real risk-free rate is 2% and the average annual expected inflation rate is 4%. The DRP and LP for Bond A are each 2%, and the applicable MRP is 3%. What is Bond A's interest rate?Suppose we observe the following rates: 1R1= 0.75%, 1R2=1.20%, E(2r1)=0.907%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2?
- The interest rate on debt, r, is equal to the real risk-free rate plus an inflation premium plus a default risk premium plus a liquidity premium plus a maturity risk premium. The interest rate on debt, r, is also equal to the -Select-purerealnominalCorrect 1 of Item 1 risk-free rate plus a default risk premium plus a liquidity premium plus a maturity risk premium.The real risk-free rate of interest may be thought of as the interest rate on -Select-long-termshort-termintermediate-termCorrect 2 of Item 1 U.S. Treasury securities in an inflation-free world. A Treasury Inflation Protected Security (TIPS) is free of most risks, and its value increases with inflation. Short-term TIPS are free of default, maturity, and liquidity risks and of risk due to changes in the general level of interest rates. However, they are not free of changes in the real rate. Our definition of the risk-free rate assumes that, despite the recent downgrade, Treasury securities have no meaningful default risk.The…The expected real interest rate approximately equals Select one: OA. the yield to maturity on a coupon bond held to maturity. OB. the nominal interest rate plus the expected rate of inflation. O C. the nominal interest rate minus the tax rate. O D. the nominal interest rate minus the expected rate of inflation.Suppose we observe the following rates: 1R1 = 6.7, 1R2 = 7.4, and E(2r1) = 6.7. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2? Please step by step.
- The risk-free rate on long-term Treasury bonds is 6.04%. Assume thatthe market risk premium is 5%. What is the required return on the market? Now use the SML equation to calculate the two companies’ requiredreturns.The outstanding bonds of Winter Tires Inc. provide a real rate of return of 3.2 percent. If the current rate of inflation is 2.1 percent, what is the actual nominal rate of return on these bonds?Calculating the risk premium on bonds The text presents a formula where (1+1) = (1-p)(1 +i+x) + p(0) where i is the nominal interest rate on a riskless bond x is the risk premium p is the probability of default (bankruptcy) If the probability of bankruptcy is zero, the rate of interest on the risky bond is When the nominal interest rate for a risky borrower is 8% and the nominal policy rate of interest is 3%, the probability of bankruptcy is %. (Round your response to two decimal places.) When the probability of bankruptcy is 6% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) When the probability of bankruptcy is 11% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) The formula assumes that payment upon default is zero. In fact, it is often positive. How would you change the formula in this case?…
- You are given the following data: Real Risk-Free Rate 4% Constant inflation premium 7% Maturity risk premium 1% Default risk premium for AAA bonds 3% Liquidity premium for long term T bonds 2% Assume that a highly liquid market does not exist for long term bonds, and the expected rate of inflation is constant. Given these conditions: a. nominal risk-free rate for T bills is? b. the rate of the long term treasury bonds is?f the nominal rate of return on an Aksoy Corporation bond is 9%, the risk premium is 4%, and the inflation premium is 2%, what is the pure rate of interest?Suppose 2-year Treasury bonds yield 4.1%,while 1-year bonds yield 3.2%. r* is 1%, and the maturity risk premium is zero.a. Using the expectations theory, what is the yield on a 1-year bond, 1 year from now?Calculate the yield using a geometric average.b. What is the expected inflation rate in Year 1? Year 2?