The Wall Street Journal reports that the current rate on 10-year Treasury bonds
ID: 2817216 • Letter: T
Question
The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 7.50 percent, on 20-year Treasury bonds is 8.10 percent, and on a 20-year corporate bond issued by MHM Corp. is 9.25 percent. Assume that the maturity risk premium is zero. If the default risk premium and liquidity risk premium on a 10-year corporate bond issued by MHM Corp. are the same as those on the 20-year corporate bond, calculate the current rate on MHM Corp.’s 10-year corporate bond. (Round answer to 2 decimal places)
Explanation / Answer
Default risk premium + maturity risk premium on MHM corp corporate bond = 20 year yield on corporate bond - 20 year yield on treasury bond
= 9.25 - 8.1 - 1.15%
10 year corporate bond yield of MNH corp = 10 year treasury bond + defautl risk premium + maturity risk premium
= 7.5% + 1.15% = 8.65%
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