A 5-year Treasury bond has a 5
A 5-year Treasury bond has a 5.2 percent yield. A 10-year Treasury
bond yields 6.4 percent, and a 10-year corporate bond yields 8.4 percent. The market
expects that inflation will average 2.5 percent over the next 10 years (IP10 _ 2.5%).
Assume that there is no maturity risk premium (MRP _ 0), and that the annual real riskfree rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP _ LP _ 0.)
A 5-year corporate bond has the same default risk premium and liquidity premium as the
10-year corporate bond described above. What is the yield on this 5-year corporate bond?
Yield on Bond = Risk Free Rate + Inflation Premium + Maturity Risk Premium + Default Risk Premium + Liquidity Premium
For the treasury bonds Default Risk Premium = 0, and Liquidity Premium = 0
Therefore for the 5-year Treasury Bond:
5.2 = Risk Free Rate = Inflation Premium
Since Inflation = 2.5%
Therefore the risk free rate = 5.2 – 2.5 = 2.7%
For the 10- year Treasury bond:
6.4 = Risk Free Rate + Inflation Premium
Risk Free Rate = 6.4 – 2.5 = 3.9%
For the 10-Year Corporate Bond
8.4 = 3.9 + 2.5 + Maturity Risk Premium + Default Risk Premium + Liquidity Premium
Maturity Risk Premium + Default Risk Premium + Liquidity Premium = 8.4 – 3.9 – 2.5
= 2%
Since there is no Market Risk Premium, then:
Default Risk Premium + Liquidity Premium = 8.4 – 3.9 – 2.5
= 2%
For the 5-year Corporate Bond:
Yield on Bond = 2.7 + 2.5 + 2
= 7.2%
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related searches
- 30 year treasury bond calculator
- 10 year treasury bond price
- 30 year treasury bond rate
- 10 year treasury bond returns
- 10 year treasury bond yield
- us 10 year treasury bond interest rate
- 10 year treasury bond rate
- how does 10 year treasury bond work
- 20 year treasury bond yield chart
- current 5 year treasury bond yield
- 10 year treasury bond news
- 5 year treasury bond rate chart history