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Smith and Carter Inc. issues thirteen-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. O 9.50% O 8.30% O 8.95% O 5.35% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O The yield on an AAA-rated bond will be lower than the yield on an AA-rated bond. O The yield on U.S. Treasury securities always remains static.

Smith and Carter Inc. issues thirteen-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. O 9.50% O 8.30% O 8.95% O 5.35% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O The yield on an AAA-rated bond will be lower than the yield on an AA-rated bond. O The yield on U.S. Treasury securities always remains static.

Intermediate Financial Management (MindTap Course List)
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 18P
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3. Calculating interest rates The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 5% per year for each of the next two years and 4% 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 Smith and Carter Inc.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating U.S. Treasury AAA AA A BBB Default Risk Premium 0.60% 0.80% 1.05% 1.45%
Transcribed Image Text:3. Calculating interest rates The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 5% per year for each of the next two years and 4% 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 Smith and Carter Inc.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating U.S. Treasury AAA AA A BBB Default Risk Premium 0.60% 0.80% 1.05% 1.45%
Smith and Carter Inc. issues thirteen-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. O 9.50% O 8.30% O 8.95% O 5.35% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O The yield on an AAA-rated bond will be lower than the yield on an AA-rated bond. O The yield on U.S. Treasury securities always remains static.
Transcribed Image Text:Smith and Carter Inc. issues thirteen-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. O 9.50% O 8.30% O 8.95% O 5.35% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O The yield on an AAA-rated bond will be lower than the yield on an AA-rated bond. O The yield on U.S. Treasury securities always remains static.
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