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http: /courses aplia com af sen et quiz?qu z action-take u z&qui; eAn Answer With Component -Account Details Aplia: Student uestion > Attempts: Keep the Highest: /2 7. Calculating interest rates Aa Aa The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 4% per year for each of the next two years and 3% thereafter The maturity risk premium (MRP) is determined from the formula: 0.1(t-1)%, where t is the security's maturity The liquidity premium (LP) on all Panda r Corp. 's bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating U.S. Treasury Default Risk Premium 0.60% 0.80% 1.05% 1.45% Pandar Corp. issues seven-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average 7.94% 8.54% 7.49% 5.25% O Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O The yield on a AAA-rated bond will be lower than the yield on a AA-rated bond O The yield on a AAA-rated bond will be higher than the yield on a BB-rated bond Session Flash Player WIN 20,0,0,228 Q3 3.34 © 2004-2016 Aplia. All rights reserved © 2013 Cengage Learning except as noted. All rights reserved Timeout 59:28 12:22 PM 4/8/2016 Grade It Now Save & Continue

Explanation / Answer

Following statement is true:

The yield on a AAA rated bond will be lower than the yield on a AA rated bond

Maturity risk premium 0.60% Liquidity premium 1.05% AA Default risk premium 0.80% Risk free rate 2.80% Total 5.25%

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