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Author Question: Given the rate information in the table below, estimate the nominal rate for a AA-rated corporate ... (Read 123 times)

magmichele12

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on: Jul 11, 2018
Given the rate information in the table below, estimate the nominal rate for a AA-rated corporate bond.
  Assume a liquidity premium of 8 basis points.
 
  Identify as part of your answer the inflation risk premium, the
  default risk premium, the maturity premium, and the liquidity premium.
  3-month T-bills 2.0
  30-year Treasury bonds 5.0
  AA-rated corp. bonds 8.0
  Inflation Rate 1.0

Question 2

A bond will pay 5,000 at maturity in 9 years. It also makes semiannual interest payments of 400 until
  maturity. If the discount rate is 7 compounded semiannually, what should be the market price of the bond?
 
  What will be an ideal response?
Foundations of Finance ¦ Keown, Petty, Martin ¦ 9th Edition
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Jevvish

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Reply #1 on: Jul 11, 2018
Answer to Question 1

k = 2.0 - 1.0 = 1.0
IRP = 1.0
DRP = 8.0 - 5.0 = 3.0
MP = 5.0 - 2.0 = 3.0
LP = .08 (given)
K = 1.0 + 1.0 + 3.0 + 3.0 + .08 = 8.08

Answer to Question 2

7,967.68


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