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

 

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Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP -0.02(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. Corporate Bond Yield Rate Spread DRP + LP U.S. Treasury 0.73% AAA corporate 0.93 AA corporato 1.27 0.20% 0.54 A corporate 1.65 0.92 What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: 23.11 % 7-year Corporate yield: 16.87 % c. Given the following Treasury bond yield information, construct a graph of the yield curve. Image transcription text ep US Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP -0.02(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. Corporate Bond Yield Rate Spread DRP + LP U.S. Treasury 0.73% AAA corporate 0.93 AA corporato 1.27 0.20% 0.54 A corporate 1.65 0.92 What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: 23.11 % 7-year Corporate yield: 16.87 % c. Given the following Treasury bond yield information, construct a graph of the yield curve. Image transcription text ep US

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Predicted Yields for Investments 1 12year Treasury Bond Real RiskFree Rate RRR 3 Inflation Years 12 ... View the full answer