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Assume that an analyst has made the following forecasts: - The real, risk-free rate is expected to remain constant at 2.85% for the next 10
Assume that an analyst has made the following forecasts: - The real, risk-free rate is expected to remain constant at 2.85% for the next 10 years. - Inflation is expected to be as follows: Year 1=4.0%; Year 2=4.0%; Year 3=6.0%; Year 4=6.0%; Year 5=8.0%; and Year 6=8.0%. - The maturity risk premium is 0.10%(t1), where t is the number of years to maturity. Also assume that you can buy a 6-year corporate bond for Company A today that yields an annual rate of return of 10.45%. Given this information, determine what the yield on a 5-year corporate bond from Company B should be if it has one half the default and liquidity premium as Company A. 8.94% 11.80% 12.66% 9.40% 10.50%
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