Suppose that 91-day Treasury bills currently yield 6 percent to maturity and that 25-year Treasury bonds yield 7.25 percent. Lopez Pharmaceutical Company recently has issued long-term, 25-year bonds that yield 9 percent to maturity.

a. If the yield on Treasury bills is taken to be the short-term, risk-free rate, what premium in yield is required for the default risk and lower marketability associated with the Lopez bonds?

b. What premium in yield above the short-term, risk-free rate is attributable to maturity?

Answer rating: 100% (QA)

Required return on Corporate bond 9 given Required ret... View the full answer