Question: What are the basic components of interest rates for borrowing? Use that equation of interest rate components to solve the following question: a. Company A

What are the basic components of interest rates for borrowing?

Use that equation of interest rate components to solve the following question:

a. Company A 10-year corporate bonds have a yield of 6.75%. In secondary Treasury market, 10 year T- bonds yield 5.30%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T- bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium of Company A corporate bonds?

b. A corporation's 5- year bonds yield 6.20% and 5-year T-bonds yield 4.40%. The real risk free rate is r*=2.5%, the inflation premium for 5-year bonds is IP=1.50%, the default risk premium for corporation 's bonds is DRP=1.30% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP= (t-1) x 0.1%, where t=number of years to maturity. What is the liquidity premium (LP) on corporations bonds?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!