Drongo Corporation's 4-year bonds currently yield 7.4 percent and have an inflation premium of 3.5%. The real

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Drongo Corporation's 4-year bonds currently yield 7.4 percent and have an inflation premium of 3.5%.

The real risk-free rate of interest, k*, is 2.7 percent and is assumed to be constant.

The maturity risk premium (MRP) is estimated to be 0.1%(t - 1), where t is equal to the time to maturity.

The default risk and liquidity premiums for this company's bonds total 0.9 percent and are believed to be the same for all bonds issued by this company.

If the average inflation rate is expected to be 5 percent for years 5, 6, and 7, what is the yield on a 7-year bond for Drongo Corporation?

Related Book For answer-question

Income Tax Fundamentals 2013

ISBN: 9781285586618

31st Edition

Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill

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Posted Date: May 10, 2023 02:52 AM

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Drongo Corporation's 4-year bonds currently yield 7.4 percent and have an inflation premium of 3.5%. The real

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Income Tax Fundamentals 2013

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