b. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year,...

 

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b. 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%, and inflation is expected to be 3% for the next 2 years, 4% for the following 4 years, and 5% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.01(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% 0.83 1.21 1.57 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: X % 0.10% 0.48 0.84 X % b. 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%, and inflation is expected to be 3% for the next 2 years, 4% for the following 4 years, and 5% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.01(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% 0.83 1.21 1.57 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: X % 0.10% 0.48 0.84 X %

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First lets calculate the components for each investment 12year Treasury Bond Real riskf... View the full answer