Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. the real risk-free rate (r) is 2.8% and is expecte

The real risk-free rate (r) is 2.8% and is expected to remain constant. Inflation is...

70.2K

Verified Solution

Question

Finance

image

The real risk-free rate (r) is 2.8% and is expected to remain constant. Inflation is expected to be 4% per year for each of the next five years and 3% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t1)%, where t is the security's maturity. The liquidity premium (LP) on all Tahoe Hydroponics's bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Tahoe Hydroponics issues 14-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. 8.81% 7.51% 8.26% 5.45% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? A BBB-rated bond has a lower default risk premium as compared to an AAA-rated bond. The yield on an AAA-rated bond will be lower than the yield on an AA-rated bond

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students

Basic Math
1.2K views

5 When corn seeds germinate they tend to grow 5 inches in the first week...

Medical Sciences
1.2K views

Why are more free radicals generated during endurance exercise?

Chemistry
1.2K views

When the partial pressure of O2 in venous blood is 30 torr, the saturation of myoglobin...

Advance Math
1.2K views

. (a) Let a and b be two non-zero vectors with a common initial point 0...

Calculus
1.2K views

5 The length of a solid cylindrical cord of elastic material is 32 inches A...

Algebra
1.2K views

harmacist wishes to r tain the desired 3 so

Accounting
1.2K views

Marin Company has the following data: direct labor $268,000, direct materials used $230,400,...

Accounting
1.2K views

Which of the following property arrangements can be classified as marital property? A. A QTIP...

Accounting
1.2K views

In 2024, the Westgate Construction Company entered into a contract to construct a road for...

Finance
1.2K views

Aadakilerden hangisi Bamszlk Farkndalk Dngsnn admlarndan biri DELDR? geerli olanlarn hepsini sein Sahip...

Finance
1.2K views

Do the Math 17-6 More Aggressive Investing Shanice Johnson, of Philadelphia, Pennsylvania, wants to invest...

Accounting
1.2K views

the Darwin company reports the following information: sales 76500 direct materials used. 7300 depreciation on...