0 Course Modules: Busines × MindTap . Cengage Lean x CSecure | https://ng.cengag
ID: 1172324 • Letter: 0
Question
0 Course Modules: Busines × MindTap . Cengage Lean x CSecure | https://ng.cengage.com/static/nb/ui/index.htminbld-8417708nbNo 9% MINDTAP Ch 06: Assignment-Interest Rates Due on jun 17 at 11.59 PM CDT ation is expected to be 4% per year for The real risk-free rate (r.) is 2.8% and oach of the next four years and 3% thereafter. to remain constant In maturity The maturity risk premium (MRP) is determined from the formula: Out-I)%, where t isthe sourity's The liquidity premium (LP) on all Gauge imports Inc.'s bonds is O 55% The following table shows the current relationship betwen bond ratings and default risk premiums (ORP) Rating Default Risk Premium US Treasury 0.60% 0.00% 1.05% 2.45% Gauge Imports Inc. issues 15-year, AA-rated bonds. What is the yield on one of these bonds? Disregand cross-product terms; that is, if avereging is required, use the orithmetic average. ? 7.42% 0 5.55% ? B.B2% O B.27% determinonts of interest rates, if everything else remains the same, which of the Based on your understanding of the fo lowing wil be true? O Higher inf lction expectuations incresese the nominal interest nate demancec by investors O A BBB-rated bene has a lewer defaul: risk anemium as comaaned to an AAAirated bendExplanation / Answer
Answer 1)
Return of security r = r* + IP + DRP + MRP + LP
where,
r = rate on a given security, r* = real risk-free rate IP = inflation premium (the average of expected future inflation rates) , DRP = default risk premium , MRP = maturity risk premium, LP = liquidity premium
In the question , given data ,
MRP = 0.1(t-1)% = 0.1* 14 = 1.4% ,LP = 0.55%, DRP= 0.80% , r* = 2.8%
IP = Average for 15 year inflation rate = (4*4 + 11*3)/15 = 3.27%
Now , r= 2.8+ 3.27+ 0.80+1.4+ 0.55 = 8.82% option C
Answer B)
Option a is true :
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.