1. What is the risk-free rate (rf)?

: 3.2%

2. What is the Yield To Maturity of Corporation As bond issue?

: 8.1%

3. What is the 20-year Maturity Risk Premium (rmp)?

4. What is the A (single-A rated corporate bond) Default Risk Premium (rdp)?

5. What price would you pay for a 10-year, AA bond with a Face Value of $1,000 and a coupon rate of 7.10%?

6. What price would you pay for a 5-year, BB bond with a Face Value of $1,000 and a coupon rate of 9.75%?

7. Why is the Maturity Risk Premium for 20 years greater than the Maturity Risk Premium for 5 years?

• At longer maturities, there is greater Default Risk

• None of the choices is correct

• At shorter maturities, there is greater Default Risk

• At longer maturities, there is greater Interest Rate Risk

• At shorter maturities, there is greater Inflation Risk

5. What would most likely happen if the AA bond were to be downgraded to a rating of A?

• The Default Risk Premium would increase and the bond price would decrease

• The Default Risk Premium would increase and the bond price would increase

• None of the above

• The Maturity Risk Premium would increase and the bond price would increase

• The Maturity Risk Premium would increase and the bond price would decrease

Face Maturity Value 1 year $ 1,000 Maturity Default risk-free Risk Risk rate Premium Premium Coupon Market Rate Price 0.00% $ 968.99 Security Rating Treasury YTM Treasury 3 years $ 1,000 1.90% $ 939.06 Treasury 5 years $ 1,000 4.30% $ 932.42 Treasury 10 years $ 1,000 6.80% $1,007.12 Treasury 20 years $ 1,000 6.60% $ 908.25 Corp A 5 years $ 1,000 8.10% $1,000.00 Corp B BB 10 years $ 1,000 7.90% $ 859.88 Corp C AA 20 years $ 1,000 8.50% $ 972.22