A 10-year Treasury bond yields 6.4%, and a 10-year corporate bond yields 8.4%. The market expects that inflation will average 2.5% over the next 10 years. A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond. What is the yield in percent on the 5-year corporate bond if a 5-year Treasury bond has a 5.2% yield? Assume that there is no maturity risk premium and that the annual real risk-free rate will remain constant over the next 10 years.
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
- A 10-year Treasury bond yields 6.4%, and a 10-year corporate bond yields 8.4%. The market expects that inflation will average 2.5% over the next 10 years. A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond. What is the yield in percent on the 5-year corporate bond if a 5-year Treasury bond has a 5.2% yield? Assume that there is no maturity risk premium and that the annual real risk-free rate will remain constant over the next 10 years.
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