The real risk-free rate is 2% which is projected to be constant indefinitely. The expected inflation for year 1 is 1%, for year 2 is 2%, and it will increase by 1% each year after. Liquidity Premium is 1% and the default risk premium is 2.5%. Maturity Risk premium for long-term securities is computed as estimated to be 0.5%(t - 1), where the variable “t” is an independent variable that shows the years of maturity of the bond. How much is the difference between the nominal rate of a 7-year long-term government issued bond and 7-year long-term corporate issued bond? a. 3.5% b. 1.5% c. 3.3% d. 5.5%
The real risk-free rate is 2% which is projected to be constant indefinitely. The expected inflation for year 1 is 1%, for year 2 is 2%, and it will increase by 1% each year after. Liquidity Premium is 1% and the default risk premium is 2.5%. Maturity Risk premium for long-term securities is computed as estimated to be 0.5%(t - 1), where the variable “t” is an independent variable that shows the years of maturity of the bond. How much is the difference between the nominal rate of a 7-year long-term government issued bond and 7-year long-term corporate issued bond? a. 3.5% b. 1.5% c. 3.3% d. 5.5%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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The real risk-free rate is 2% which is projected to be constant indefinitely. The expected inflation for year 1 is 1%, for year 2 is 2%, and it will increase by 1% each year after. Liquidity Premium is 1% and the default risk premium is 2.5%. Maturity Risk premium for long-term securities is computed as estimated to be 0.5%(t - 1), where the variable “t” is an independent variable that shows the years of maturity of the bond.
How much is the difference between the nominal rate of a 7-year long-term government issued bond and 7-year long-term corporate issued bond?
a. 3.5%
b. 1.5%
c. 3.3%
d. 5.5%
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