ntFriday-Chapter 6 Assigmment Score: 0009 Save Exit Submit Assignment for Gradin
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ntFriday-Chapter 6 Assigmment Score: 0009 Save Exit Submit Assignment for Grading ii 4Question 2 of 3 , Check My Work (5 remaining) Click here to read the eBook: The Determinants of Market Interest Rates DEFAULT RISK PREMIUM A company's 5-year bonds are yielding 9.7% per year. Treasury bonds with the same maturity are yelleg 6% per year, and the real risk-free rate (r) is 2.4%. The average inflation premun is 3.2%, and the maturity nsk premwm, is estimated to be 0.1 x (t-1)%, where t-number of years to maturity. If the quidity prem ums l 45% whats the default mk p em um on the corporate bonds? Round your answer to two dec mal places. Check My Work (5 remaining)Explanation / Answer
Maturity Risk Premium = 0.1 x (5 - 1)% = 0.4%
Bond Yield = Real Risk free rate + Inflation premium + Maturity risk premium + Liquidity Premium + Default risk premium
9.7% = 2.4% + 3.2% + 0.4% + 1.45% + Default risk premium
Default risk premium = 9.7% - 7.45% = 2.25%
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