6. Bonds Valuation: Determinants of Market Interest Rate

• Quantitative Problem

Bonds Valuation: Determinants of Market Interest Rate

An analyst evaluating securities has obtained the following information. The real rate of interest is 2.7% and is expected to remain constant for the next 5 years. Inflation is expected to be 2.2% next year, 3.2% the following year, 4.2% the third year, and 5.2% every year thereafter. The maturity risk premium is estimated to be 0.1 (t 1)%, where t = number of years to maturity. The liquidity premium on relevant 5-year securities is 0.5% and the default risk premium on relevant 5-year securities is 1%. a. What is the yield on a 1-year T-bill? Do not round intermediate calculations. Round your answer to one decimal place. %

b. What is the yield on a 5-year T-bond? Do not round intermediate calculations. Round your answer to one decimal place. %

c. What is the yield on a 5-year corporate bond? Do not round intermediate calculations. Round your answer to one decimal place. %