A. Suppose you are considering two possible investment opportunities, a 12 year Treasury bond and a 7
Question:
A. Suppose you are considering two possible investment opportunities, a 12 year Treasury bond and a 7 year, A rated corporate bond. The current real risk free rate is 4%. Inflation is expected to 2% for the next two years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula MRP = 0.1%(t-1)%. The liquidly premium for the corporate bond is estimated to be 0.7%. Finally, you may determine the default risk premium, given the company's bond rating, from the default risk premium table. What yield would you predict for each of these two investments? (IF who ever helps me can provide me with each formula).
B. Given the following Treasury Bond yield information from the September 28, 2001, Federal Reserve Statistical Rel construct a graph of the yield curve as of that date: periods: 3 months, 6 months, 1yr, 2yr, 3yr, 5yr, 7yr, 10yr, 20yr. Year: 0.25, 0.50, 1.00, 2.00, 3.00, 5.00, 7.00, 10., 20. Yield: 1.16%, 1.17%, 1.25%, 1.62%, 2.05%, 2.92%, 3.50%, 3.95%, 4.96%. Construct a yield chart.
C. The real risk free rate would be the same for the corporate and treasury bonds. Similarly, without information to the contrary, we would assume that the maturity and inflation premiums would be the same for bonds with the same maturities. However, the corporate across maturities, then we can use the LP and DRP premiums as determined above and add them to the T-bond yields to find the corporate yields. This procedure was used in the table below.
Based on the information about the corporate bond that was given in Part A, calculate yields and construct a new graph that shows both the Treasury and the corporate bonds.
Fundamentals of Financial Management
ISBN: 978-0324664553
Concise 6th Edition
Authors: Eugene F. Brigham, Joel F. Houston