Question
What are the basic components of interest rates for borrowing? Use that equation of interest rate components to solve the following question: a. Company A
What are the basic components of interest rates for borrowing?
Use that equation of interest rate components to solve the following question:
a. Company A 10-year corporate bonds have a yield of 6.75%. In secondary Treasury market, 10 year T- bonds yield 5.30%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T- bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium of Company A corporate bonds?
b. A corporation's 5- year bonds yield 6.20% and 5-year T-bonds yield 4.40%. The real risk free rate is r*=2.5%, the inflation premium for 5-year bonds is IP=1.50%, the default risk premium for corporation 's bonds is DRP=1.30% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP= (t-1) x 0.1%, where t=number of years to maturity. What is the liquidity premium (LP) on corporations bonds?
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