You are considering investing in a 3-year BBB-rated corporate bond issued by BHP Billiton, a...
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You are considering investing in a 3-year BBB-rated corporate bond issued by BHP Billiton, a mining company. Assume that the 3-year Treasury bonds pay 5% p.a. Inflation is expected to be 1.5% p.a. The maturity risk premium is 2.5% p.a., and the default risk premium for A-rated corporate bonds is 3% p.a. If the liquidity-risk premium for a BBB-rated corporate bond, A-rated corporate bond and the Treasury bond are the same, what rate of interest below is more appropriate for the BBB-rated corporate bond to pay?
a.
9.5%
b.
7%
c.
8%
d.
6.5%
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