The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next four years and 7% 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 Pellegrini Southern Inc.’s bonds is 0.55%. 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% Pellegrini Southern Inc. issues fifteen-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. 11.42% 12.82% 12.27% 5.55% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? Higher inflation expectations increase the nominal interest rate demanded by investors. The yield on U.S. Treasury securities always remains static.
The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next four years and 7% 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 Pellegrini Southern Inc.’s bonds is 0.55%. 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% Pellegrini Southern Inc. issues fifteen-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. 11.42% 12.82% 12.27% 5.55% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? Higher inflation expectations increase the nominal interest rate demanded by investors. The yield on U.S. Treasury securities always remains static.
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 23P
Related questions
Question
The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next four years and 7% 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 Pellegrini Southern Inc.’s bonds is 0.55%. 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% |
Pellegrini Southern Inc. issues fifteen-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.
11.42%
12.82%
12.27%
5.55%
Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true?
Higher inflation expectations increase the nominal interest rate demanded by investors.
The yield on U.S. Treasury securities always remains static.
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