A 5 year Treasury bond has a 4 55 yield A 10 year Treasury bond yields 6 75 , and a 10 year corporate bond yields 8 45 The market expects that inflation will average 2 85 over the next 10 years (IP10 2 85 ) Assume that there is no maturity risk premium (MRP 0) and that the annual real risk free rate, r , will remain constant over the next 10 years (Hint Remember that the default risk premium and the liquidity premium are zero for Treasury securities DRP LP 0 ) A 5 year corporate bond has the same default risk premium and liquidity premium as the 10 year corporate bond described BPC has decided to evaluate the riskier project at 12 and the less risky project at 10 What is each project's expected annual cash flow Round your answers to two decimal places Project A $ Project B $ Project B's standard deviation ( B ) is $5,797 84 and its coefficient of variation (CV B ) is 0 76 What are the values of ( A ) and (CV A ) Round your answers to two decimal places A $ CV A Based on the risk adjusted NPVs, which project should BPC choose If you knew that Project B's cash flows were negatively correlated with the firm's other cash flow, but Project A's cash flows were positively correlated, how might this affect the decision This would make Project B more appealing This would make Project B less appealing If Project B's cash flows were negatively correlated with gross domestic product (GDP), while A's cash flows were positively correlated, would that influence your risk assessment This would make Project B more appealing This would make Project B less appealing

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Oct 02, 2024

A 5-year Treasury bond has a 4.55% yield. A 10-year Treasury bond yields 6.75%, and a 10-year corporate bond yields 8.45%. The market expects that

A 5-year Treasury bond has a 4.55% yield. A 10-year Treasury bond yields 6.75%, and a 10-year corporate bond yields 8.45%. The market expects that inflation will average 2.85% over the next 10 years (IP10 = 2.85%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP = LP = 0.) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described.

BPC has decided to evaluate the riskier project at 12% and the less-risky project at 10%.

What is each project's expected annual cash flow? Round your answers to two decimal places.

Project A: $

Project B: $

Project B's standard deviation (_B) is $5,797.84 and its coefficient of variation (CV_B) is 0.76. What are the values of (_A) and (CV_A)? Round your answers to two decimal places.

_A = $

CV_A =
Based on the risk-adjusted NPVs, which project should BPC choose?
If you knew that Project B's cash flows were negatively correlated with the firm's other cash flow, but Project A's cash flows were positively correlated, how might this affect the decision? This would make Project B more appealing.This would make Project B less appealing.

If Project B's cash flows were negatively correlated with gross domestic product (GDP), while A's cash flows were positively correlated, would that influence your risk assessment? This would make Project B more appealing.This would make Project B less appealing.