Assume that an analyst has made the following forecasts: The real, risk-free rate is expected to...

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Assume that an analyst has made the following forecasts: The real, risk-free rate is expected to remain constant at 2.85% for the next 10 years. Inflation is expected to be as follows: Year 1 = 6%; Year 2 = 10%; Year 3 = 8%; Year 4 = 6%; Year 5 = 4%; and then constant at 3%. The maturity risk premium is 0.10% (t-1), where t is the number of years to maturity. Also assume that you can buy a 5-year corporate bond today that yields an annual rate of return of 11.70%. Given this information, determine what the yield on this bond should be in one year (this will then be a 4-year bond), if the above forecasts are correct and the bond's default premium and liquidity premium remain unchanged. Assume that an analyst has made the following forecasts: The real, risk-free rate is expected to remain constant at 2.85% for the next 10 years. Inflation is expected to be as follows: Year 1 = 6%; Year 2 = 10%; Year 3 = 8%; Year 4 = 6%; Year 5 = 4%; and then constant at 3%. The maturity risk premium is 0.10% (t-1), where t is the number of years to maturity. Also assume that you can buy a 5-year corporate bond today that yields an annual rate of return of 11.70%. Given this information, determine what the yield on this bond should be in one year (this will then be a 4-year bond), if the above forecasts are correct and the bond's default premium and liquidity premium remain unchanged.

Answer rating: 100% (QA)

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