FINANCIAL MARKETS AND INSTITUTIONS -)

chapter3 (interest rate structure

solve this Quastion

6. Commercial Paper Yield a. A corporation is planning to sell its 90-day com- mercial paper to investors by offering an 8.4 percent yield. If the three-month T-bill's annualized rate is 7 percent, the default risk premium is estimated to be 0.6 percent, and there is a 0.4 percent tax adjustment, then what is the appropriate liquidity premium? b. Suppose that, because of unexpected changes in the economy, the default risk premium increases to 0.8 percent. Assuming that no other changes occur, what is the appropriate yield to be offered on the commercial paper? 8. After-Tax Yield Determine how the after-tax yield from investing in a corporate bond is affected by higher tax rates, holding the before-tax yield constant. Explain the logic of this relationship. 9. Debt Security Yield a. Determine how the appropriate yield to be offered on a security is affected by a higher risk-free rate. Explain the logic of this relationship. b. Determine how the appropriate yield to be offered on a security is affected by a higher default risk pre- mium. Explain the logic of this relationship