Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Use the following Treasury curve and forecast data: 1yr:3.0% 2 yr: 3.2% 3 yr: 3.5% 4 yr: 3.6% 5 yr: 3.8% 7 yr: 3.9% 10
Use the following Treasury curve and forecast data: 1yr:3.0% 2 yr: 3.2% 3 yr: 3.5% 4 yr: 3.6% 5 yr: 3.8% 7 yr: 3.9% 10 yr: 4.0% 5yr TIPs: 0.5% 7yr TIPS: 0.8% Investor survey for average of short-term rates over the next 3 years: 3.1% Investor survey for average of short-term rates over the next 7 years: 3.4% Investor survey for average of short-term rates over the next 10 years: 3.4% 1) A 5-year corporate bond has a coupon of 4.0%, a market yield of 5%, a cumulative probability of default of 1.2%, and an expected recovery under default of 50%. What is the approximate risk premium and how does it relate to the spread? 2) What is the expected annual rate of inflation for the next 7 years? If you believed there is a more positive term premium in the Treasury curve relative to the TIPs curve does your estimate overstate or understate the inflation estimate? 3) What is the term premium for the next seven years? How does this specific number affect your interpretation of forward rates? Use the following Treasury curve and forecast data: 1yr:3.0% 2 yr: 3.2% 3 yr: 3.5% 4 yr: 3.6% 5 yr: 3.8% 7 yr: 3.9% 10 yr: 4.0% 5yr TIPs: 0.5% 7yr TIPS: 0.8% Investor survey for average of short-term rates over the next 3 years: 3.1% Investor survey for average of short-term rates over the next 7 years: 3.4% Investor survey for average of short-term rates over the next 10 years: 3.4% 1) A 5-year corporate bond has a coupon of 4.0%, a market yield of 5%, a cumulative probability of default of 1.2%, and an expected recovery under default of 50%. What is the approximate risk premium and how does it relate to the spread? 2) What is the expected annual rate of inflation for the next 7 years? If you believed there is a more positive term premium in the Treasury curve relative to the TIPs curve does your estimate overstate or understate the inflation estimate? 3) What is the term premium for the next seven years? How does this specific number affect your interpretation of forward rates
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