1. Expected Interest Rate The real risk-free rate is 3%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on a 2-year Treasury securities? What is the yield on 3-year Treasury securities?
2. Default Risk Premium A company’s 5-year bonds are yielding 7.75% per year. Treasury bonds with the same maturity are yielding 5.2% per year, and the real risk-free rate (r*) is 2.3%. The average inflation premium is 2.5%; and the maturity risk premium is estimated to be 0.1 x (t-1)%, where t= number of years to maturity. If the liquidity premium is 1%, what is the default risk premium on the corporate bonds?
Please explain how you got your answer(s):
BOND VALUATION An investor has two bonds in his portfolio that have a value of $1,000 and a 10% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year.
a. What will the value of each bond be if the going interest rate is
Assume that only one more interest payment is going to be made on Bond S as its maturity and that 15 more payments are to be made in Bond L.
Please find the values for Bond S and Bond L for each of the above possible interest rates.
b. Why does the longer-term bond’s price vary more than the shorter-term bond when interest rates change?
BOND RETURNS Last year Joan purchased a $1,000 face value corporate bond with an 11% annual coupon rate and a 10-year maturity. At the time of the purchase, it had an expected yield to maturity of 9.79%. If Joan sold the bond today for $1,060.49:
2) What rate of return would she have earned on the bond?