Question
Roys Co. and Betsys Inc. are two corporations with the following information about bonds: Roy Betsy Default premium 2 percent 1.2 percent Liquidity premium 2
Roys Co. and Betsys Inc. are two corporations with the following information about bonds:
Roy | Betsy | |
Default premium | 2 percent | 1.2 percent |
Liquidity premium | 2 percent | 1.8 percent |
Options | Callable | Putable |
Both bonds are issued in the same country that has a real risk free rate of 2 percent, expected average annual inflation rate of 1.8 percent for years 1 through 5, and expected average annual inflation rate of 1.9 percent for years 6 through 10. The maturity of Roys bond is 10 years and Betsys is 5 years. Investors require a maturity risk premium of 0.2 percent per year. Also, investors require a compensation of 0.5 percent for any option that corporations keep whereas investors are willing to pay 1 percent for an option they receive.
Based on the information, CALCULATE THE EXPECTED RETURN ON BOTH ROYS AND BETSYS BONDS.
YOU MUST SHOW THE NUMBERS BASED ON EXPECTED RETURN FORMULA THAT HAS THE RISK FREE RATE AND ALL THE PREMIUMS.
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