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Can someone let me know what I'm doing wrong? b. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7year,
Can someone let me know what I'm doing wrong?
b. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7year, AA-rated corporate bond. The current real risk-free rate is 5%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP =0.03(t1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.2%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: % 7-year Corporate yield: % c. Given the following Treasury bond yield information, construct a graph of the yield curve. Interest Rate Determination and Yield Curves b. Finding the yield for each of the two investments 12-year Treasury Bond Formulas Real risk-free rate 5%=C4 Inflation premium 3.333%=(C52+C64+C76)/12 Maturity risk premium 3.300%=0.3(121)% 12-year Treasury yield 11.633%=SUM(C15:C17) \begin{tabular}{l|r|} \hline Rating & \multicolumn{1}{|c|}{ DRP + LP } \\ \hline AAA & 0.20% \\ \hline AA & 0.56% \\ \hline A & 0.96% \\ \hline \end{tabular} 7-year Corporate BondStep by Step Solution
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