5)At the same time as you observe the information in #4 above, you observe that the required yield on a AAA rated corporate bond is 7.65%. Assuming that the liquidity premium for the AAA bond is 0.2%, what is the default risk premium for AAA bonds?

. If a bond with 30 years to maturity and a coupon rate of 8.2% (paid semi-annually) is selling for $895, what is the yield to maturity for this bond? Provide a brief description of what the term yield to maturity means. (2 pts.)

Yield to maturity means the expected return of the bond in market by the investors. This is the return they want for the money they are investing.

We can find it using rate formauel in excel

rate(nper,pmt,pv,fv,type)

nper=30*2=60 since semiannual

pmt=8.2%/2*1000=$41 (semiannual coupon)

pv=-895

fv=1000

type=0

guess=1

=RATE(60,41,-895,1000,,1)=4.62%

YTM=4.62%*2=9.24%

YTM is the annual rate of return investor will get will investor purchase bond today and hold the bond till maturity

3. If the bond in #2 above were callable in 5 years at a price of par value plus one years interest, what would be the yield-to-call? Interpret this figure. (2 pts)