15. Assume that today, the annualized one-year interest rate is 8 also know thar

Question

15. Assume that today, the annualized one-year interest rate is 8 also know thar o percent One adjustment, and percent. A two-year security has an annualized percent. One year from now, you are planning to sell the I-year commercial paper to investors also know that the liquidity premium for your company is estimated to be 0.4 pereent, there aercial paper the appropriate default premium is 1 percent. Find the yield of your future (Hint: I-year risk-free rate equals to I-year forward rate minus I percent)

Explanation / Answer

the forward rate in a year = (1+2 year spot rate)^2/(1+ spot rate) - 1 = 1.092/1.08 - 1 = 10.01%

amount of return required for investors = 10.01% + 1% + 0.4% +0.5% = 11.91%

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