The real risk-free rate of interest, k* is 3 percent. Inflation is expected to be 4 percent this year, 5 percent next year, and 3 percent per year thereafter. The maturity risk premium equals 0.1% (t - 1), where t equals the bond's maturity. That is a 5-year bond has a maturity risk premium of 0.4 percent. A 5-year corporate bond yields 8 percent. What is the yield on a 10-year corporate bond that has the same default risk and liquidity premium as the 5 -year corporate bond?
The real risk-free rate of interest, k* is 3 percent. Inflation is expected to be 4 percent this year, 5 percent next year, and 3 percent per year thereafter. The maturity risk premium equals 0.1% (t - 1), where t equals the bond's maturity. That is a 5-year bond has a maturity risk premium of 0.4 percent. A 5-year corporate bond yields 8 percent. What is the yield on a 10-year corporate bond that has the same default risk and liquidity premium as the 5 -year corporate bond?
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 10P
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The real risk-free rate of interest, k* is 3 percent. Inflation is expected to be 4 percent this year, 5 percent next year, and 3 percent per year thereafter. The maturity risk premium equals 0.1% (t - 1), where t equals the bond's maturity. That is a 5-year bond has a maturity risk premium of 0.4 percent. A 5-year corporate bond yields 8 percent. What is the yield on a 10-year corporate bond that has the same default risk and liquidity premium as the 5 -year corporate bond?
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