you are considering investment opportunities in either treasury bonds, or BB- ra

Question

you are considering investment opportunities in either treasury bonds, or BB- rated bonds from Janis's Swedish meatball corporation. The current real risk free return is 1.6 %. Inflation is expected to be 1 % for the next two years, and 2 % thereafter. The maturity rish premium is estimated by this formula: MRP= .1(t-1)%. The liquidity premium for corporate bonds is .7 %. The default risk premium for corporate bonds is 1.5 %.

11What would you expect the uield to be on janis hultgren 1 year, 2 year, 5 year, and 10 year bonds? What yields would you expect on 1 year, 2 year, 5 year, and 10 year treasury bonds?

2. what would happen to the spread if it went from a BBB to a BB?

Explanation / Answer

1) yield on janis is

1 year 4.1 %

2 year 4.2%

5 year 5.5 %

10 year 6 %

trasury bond

1 year 2.6

2 year 2.6

5 year 3.6

10 year 3.6

2)spread would increase

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