Kern Corporation\'s 5-year bonds yield 6.80% and 5-year T-bonds yield 3.60%. The
ID: 2621650 • Letter: K
Question
Kern Corporation's 5-year bonds yield 6.80% and 5-year T-bonds yield 3.60%. The real risk-free rate is r* = 2.5%, the default risk premium for Kern's bonds is DRP = 1.90% versus zero for T-bonds, the liquidity premium on Kern's bonds is LP = 1.3%, and the maturity risk premium for all bonds is found with the formula MRP = (t Kern Corporation's 5-year bonds yield 6.80% and 5-year T-bonds yield 3.60%. The real risk-free rate is r* = 2.5%, the default risk premium for Kern's bonds is DRP = 1.90% versus zero for T-bonds, the liquidity premium on Kern's bonds is LP = 1.3%, and the maturity risk premium for all bonds is found with the formula MRP = (tExplanation / Answer
Inflation premium = Total premium - ( r* + DRP + LP + MRP )
= 6.8 - [ 2.5 + 1.9 +1.3 + (5-1)*0.1 ] = 0.7%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.