Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. Corporate Bond Yield Rate Spread = DRP + LP U.S. Treasury 0.73 % — AAA corporate 0.93 0.20 % AA corporate 1.33 0.60 A corporate 1.75 1.02 What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: 6.553%----->correct 7-year Corporate yield: ? % Maturity Yield 1 year 5.37 % 2 years 5.42 3 years 5.58 4 years 5.64 5 years 5.56 10 years 5.68 20 years 6.19 30 years 5.85 Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places. Years Treasury yield AA-corporate yield 1 5.37 % ? % 2 5.42 % ? % 3 5.58 % ? % 4 5.64 % ?% 5 5.56 % ?% 10 5.68 % ? % 20 6.19 % ? % 30 5.85 % ? % Please help me figure out question marks in spaces :)
Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. Corporate Bond Yield Rate Spread = DRP + LP U.S. Treasury 0.73 % — AAA corporate 0.93 0.20 % AA corporate 1.33 0.60 A corporate 1.75 1.02 What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: 6.553%----->correct 7-year Corporate yield: ? % Maturity Yield 1 year 5.37 % 2 years 5.42 3 years 5.58 4 years 5.64 5 years 5.56 10 years 5.68 20 years 6.19 30 years 5.85 Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places. Years Treasury yield AA-corporate yield 1 5.37 % ? % 2 5.42 % ? % 3 5.58 % ? % 4 5.64 % ?% 5 5.56 % ?% 10 5.68 % ? % 20 6.19 % ? % 30 5.85 % ? % Please help me figure out question marks in spaces :)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
100%
Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP.
| Corporate Bond Yield | ||||
| Rate | Spread = DRP + LP | |||
| U.S. Treasury | 0.73 | % | — | |
| AAA corporate | 0.93 | 0.20 | % | |
| AA corporate | 1.33 | 0.60 | ||
| A corporate | 1.75 | 1.02 |
What yield would you predict for each of these two investments? Round your answers to three decimal places.
12-year Treasury yield: 6.553%----->correct
7-year Corporate yield: ? %
| Maturity | Yield | |
| 1 year | 5.37 | % |
| 2 years | 5.42 | |
| 3 years | 5.58 | |
| 4 years | 5.64 | |
| 5 years | 5.56 | |
| 10 years | 5.68 | |
| 20 years | 6.19 | |
| 30 years | 5.85 |
Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places.
| Years | Treasury yield | AA-corporate yield | ||
| 1 | 5.37 | % | ? % | |
| 2 | 5.42 | % | ? % | |
| 3 | 5.58 | % | ? % | |
| 4 | 5.64 | % | ?% | |
| 5 | 5.56 | % | ?% | |
| 10 | 5.68 | % | ? % | |
| 20 | 6.19 | % | ? % | |
| 30 | 5.85 | % | ? % |
Please help me figure out question marks in spaces :)
Transcribed Image Text:b. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free
rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by
this formula: MRP = 0.02(t-1) %. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium
(DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at
the bond's DRP.
U.S. Treasury
AAA corporate
AA corporate
A corporate
Rate
0.73%
0.93
1.33
1.75
Maturity
1 year
2 years
3 years
4 years
5 years
10 years
Corporate Bond Yield
Spread = DRP + LP
What yield would you predict for each of these two investments? Round your answers to three decimal places.
12-year Treasury yield:
7-year Corporate yield:
c. Given the following Treasury bond yield information, construct a graph of the yield curve.
Yield
5.37%
5.42
5.58
5.64
5.56
5.68
10.533 %
0.20%
0.60
1.02
9.597 %
Transcribed Image Text:d. Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury
and the corporate bonds. Round your answers to two decimal places.
Years
A.
1
2
3
4
5
t Rate
10
20
30
Choose the correct graph.
The correct graph is
8%
7%
6%
Treasury yield
5%-
5.37%
5.42%
5.58%
5.64%
5.56%
5.68%
6.19%
5.85%
AA-corporate
yield
%
%
%
%
%
%
%
%
Treasury and Corporate Yield Curves
B.
8%-
t Rate
7%
6%-
e 5%
Treasury and Corporate Yield Curves
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 5 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education