Question
PLEASE HELP ME: I need help with the questions below. Thank you:) (Part b). Suppose you are considering two possible investment opportunities: a 12-year Treasury
PLEASE HELP ME: I need help with the questions below.
Thank you:)
(Part b). Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 4%, 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 = 0.02(t - 1)%. 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.
Corporate Bond Yield | ||||
Rate | Spread = DRP + LP | |||
U.S. Treasury | 0.83 | % | ||
AAA corporate | 0.93 | 0.10 | % | |
AA corporate | 1.33 | 0.50 | ||
A corporate | 1.77 | 0.94 |
What yield would you predict for each of these two investments? Round your answers to three decimal places.
12-year Treasury yield: fill in the blank %
7-year Corporate yield: fill in the blank %
(Part d). Based on the information about the corporate bond provided in part b, calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places.
Years | Treasury yield | AA-corporate yield | ||
1 | 5.32 | % | fill in the blank % | |
2 | 5.42 | % | fill in the blank % | |
3 | 5.58 | % | fill in the blank % | |
4 | 5.63 | % | fill in the blank % | |
5 | 5.56 | % | fill in the blank % | |
10 | 5.67 | % | fill in the blank % | |
20 | 6.21 | % | fill in the blank % | |
30 | 5.88 | % | fill in the blank % |
(Part c.)Given the following Treasury bond yield information.
Note: This graph below is to help you with the question for (Part f)
Maturity | Yield | |
1 year | 5.32 | % |
2 years | 5.42 | |
3 years | 5.58 | |
4 years | 5.63 | |
5 years | 5.56 | |
10 years | 5.67 | |
20 years | 6.21 | |
30 years | 5.88 |
(Part f.) Using the Treasury yield information in part c, calculate the following rates using geometric averages (round your answers to three decimal places):
The 1-year rate, 1 year from now
fill in the blank %
The 5-year rate, 5 years from now
fill in the blank %
The 10-year rate, 10 years from now
fill in the blank %
The 10-year rate, 20 years from now
fill in the blank %
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