Question
A 5 year Treasury bond has a 3.4% yield. A 10 year Treasury bond yields 4.5%, and a 10 year corporate bond yields 9.7%. The
A 5 year Treasury bond has a 3.4% yield. A 10 year Treasury bond yields 4.5%, and a 10 year corporate bond yields 9.7%. The market expects that inflation will average 2.6% over the next 10 years. Assume there is no Maturity Risk Premium. Assume the annual real risk-free rate will remain constant over the next 10 years. A 5 year corporate bond has the same default risk premium and liquidity risk premium as the 10 year corporate bond described. What is the yield on the 5 year corporate bond (5pts.)? (Risk-free rate (5pts.); 5-year Inflation Premium (2.5pts); DRP & LP (2.5pts.)
World, Inc. has bonds outstanding with 7 years left to maturity. The bonds have a 6% annual coupon rate and were issued a year ago at their par value of $1,000. The interest rates have shifted and the bond's market price has fallen to 922.80. The capital gains yield last year was -9.65%.
What is the yield to maturity? (5pts)
For the coming year, what are the expected current yield ( annual coupon price divided by the current price) and capital gains yield (difference between YTM and current yield)? (5pts)
Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ? (5pts)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started