Harrington Horticulture Co. 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. A.) 10.77% B.) 11.22% C.) 11.82% D.) 5.25% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? A.) The yield on an AAA-rated bond will be higher than the yield on a BB-rated bond. B.) The yield on an AAA-rated bond will be lower than the yield on an AA-rated bond.
Harrington Horticulture Co. 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. A.) 10.77% B.) 11.22% C.) 11.82% D.) 5.25% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? A.) The yield on an AAA-rated bond will be higher than the yield on a BB-rated bond. B.) The yield on an AAA-rated bond will be lower than the yield on an AA-rated bond.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter4: Bond Valuation
Section: Chapter Questions
Problem 23P
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Question
The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 7% per year for each of the next four years and 6% 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 Harrington Horticulture Co.’s bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP):
Rating
Default Risk Premium
U.S. Treasury —
AAA 0.60%
AA 0.80%
A 1.05%
BBB 1.45%
Harrington Horticulture Co. 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.
A.) 10.77%
B.) 11.22%
C.) 11.82%
D.) 5.25%
Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true?
A.) The yield on an AAA-rated bond will be higher than the yield on a BB-rated bond.
B.) The yield on an AAA-rated bond will be lower than the yield on an AA-rated bond.
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