Determinants of Interest Rate for Individual Securities A Corporation's 10-year bonds have an equilibrium rate of return is 10.00percent. For all securities, the inflation risk premium is 1.69 percent and the real interest rate is 3.19 percent. The security'sliquidity risk premium is .34 percent and maturity risk premium is .89 percent. The security has no special covenants. What is thebond's default risk premium?

Given, Equilibrium rate of return = 10% Inflation risk premium = 1.69% Real interest rate = 3.19%…

Answered: Determinants of Interest Rate for…

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 19P

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Determinants of Interest Rate for Individual Securities A particular security's default risk premium is 3.90 percent. For all securities, the inflation risk premium is 2.65 percent and the real interest rate is 3.20 percent. The security's liquidity risk premium is .90 percent and maturity risk premium is 1.15 percent. The security has no special covenants. What is the security's equilibrium rate of return?
What is the default risk premium on Aaa corporate bond, if the interest rate on that bond is 3.25 percent and the interest rate on a Treasury security is 1.16 percent?
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Calculating the risk premium on bonds The text presents a formula where (1+1) = (1-p)(1 +i+x) + p(0) where i is the nominal interest rate on a riskless bond x is the risk premium p is the probability of default (bankruptcy) If the probability of bankruptcy is zero, the rate of interest on the risky bond is When the nominal interest rate for a risky borrower is 8% and the nominal policy rate of interest is 3%, the probability of bankruptcy is %. (Round your response to two decimal places.) When the probability of bankruptcy is 6% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) When the probability of bankruptcy is 11% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) The formula assumes that payment upon default is zero. In fact, it is often positive. How would you change the formula in this case?…
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A particular security’s equilibrium rate of return is 8 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 3.5 percent. The security’s liquidity risk premium is .25 percent and maturity risk premium is .85 percent. The security has no special covenants. Calculate the security’s default risk premium. You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants.The Wall Street Journal reports that one-year T-bills are currently earning 3.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real interest rate " 2.25% Default risk premium " 1.15% Liquidity risk premium " 0.50% Maturity risk premium " 1.75% What is the inflation premium? What is the fair interest rate on Moore Corporation 30-year bonds?
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3. A. Rank the following financial securities in order of interest rate risk (1 being the lowest and 3 being the highest).a. 10-year traditional coupon bondb. 10-year zero-coupon bondc. 10-year fully amortizing loan B. Rank the following financial securities in order of reinvestment risk (1 being the lowest and 3 being the highest).d. 10-year traditional coupon bonde. 10-year zero-coupon bondf. 10-year fully amortizing loan
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A particular security’s rate of return is 6 percent. For all securities, the inflation risk premium is 1.27 percent and the real risk-free rate is 1.09 percent. If the security’s liquidity risk premium is 0.91 percent, its defaul risk premium is 0.60 percent and has no special covenants, what is the security’s maturity risk premium.
How do investors calculate the net present value of a bond? If a bond's coupon payment is C, the interest rate is R, and the bond's coupon payment is made in each period for T years at which time the original principal, P, is repaid, then the bond's present discounted value (PDV) is C A. PDV = + (1 + R) (1 + R? (1 + R)T B. PDV = C(1 + R) + C(1 + R)2 - + C(1 + R)T + P(1 + R)T + C P OC. PDV = - + R R2 RT RT C D. PDV = P + C C (1 + R) (1+R)2 (1 + R)T C E. PDV = + + + + (1 + R) (1+ R)2 (1 + R)T (1 + R)T If the interest rate is 9 percent, what is the present value of a perpetuity that pays $50,000 each year, forever? The perpetuity's value is $ (Enter a numeric response rounded to two decimal places.)
(7.4) A bond's yield to maturity should not be confused with its which is a bond's annual coupon divided by its price. Unless the market value of the bond is equal to its the yield to maturity is determined by using a(n) approach. greatesser) te interest rate risk. (7.5) A allows the company to repurchase or "call" part or all of the bond issue at stated prices over a specific period. The difference between the and the is the call premium. Call provisions are often not operative during the first ; during this period of prohibition, the part of a bond's life. This is a bond is said to be

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