Question
Hi, need assistance I am strugging with Finanical Management question Suppose you are considering two possible invvestment opportunities, a 12 year Treasury bond and a
Hi, need assistance I am strugging with Finanical Management question
Suppose you are considering two possible invvestment opportunities, a 12 year Treasury bond and a 7 year, A rated corporate bond. The current real risk free rate is 4%. Inflation is expected to 2% for the next two years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula MRP = 0.2%(t-1)%. The liquity premium for the corporate bond is estimated to be 0.3%. Finally, you may determine the default risk premium, given the company's bond rating, from the default risk premium table.W 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 it be for each of these two investments?
Rate Corporate Bond Yield spread = DRP +LP
US treasury 0.83% ----------
AAA corporate 0.93 0.1%
AA corporate 1.29 0.46
A corporate 1.67 0.84
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