5. A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corpora

Question

5. A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has a yield of 9%. Assume that the liquidity premium on the corporate bond is 0.4%. What is the default risk premium on the corporate bond? Round your answer to two decimal places.

6.

The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 8.4%. What is the maturity risk premium for the 2-year security?

7.

Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 6 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the bonds? Round your answer to the nearest cent.

8.

Thatcher Corporation's bonds will mature in 20 years. The bonds have a face value of $1,000 and an 12% coupon rate, paid semiannually. The price of the bonds is $850. The bonds are callable in 5 years at a call price of $1,050. Round your answers to two decimal places.

What is their yield to maturity?
%

What is their yield to call?
%

9.

The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year.

Explanation / Answer

5. corporate bond yield = risk free rate + liquidity premium + default risk free premium

default risk free premium = 9%-6%-0.4%= 2.60%

6.

security yield =real risk free rate +inflation + default risk free premium+ maturity risk premium

maturity risk premium = 8.4% -3%--3%= 2.40%

7. Coupon payment = 10%*1000/2= 50

Price of the bond = 50/(1+8.5%/2) + 50/(1+8.5%/2)^2 + 50/(1+8.5%/2)^3

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