Question 1:

Part A. A firm is planning to sell its corporate bond to investors by offering an 9.6 percent yield. If the three-month Treasury bills annualized rate is 6 percent, the credit risk premium is estimated to be 0.75 percent, and there is a 0.62 percent tax adjustment, then what is the liquidity premium on the commercial paper?

Part B. Suppose that the credit risk premium decreases to 0.5 percent. Assuming that no other changes occur, what is the appropriate yield to be offered on the corporate bond?