The 10-year bonds of Gator Corporation are yielding 8% per year. Treasury bonds with the same maturity are yielding 6.4% per year. The real risk-free rate (r*) is expected to be constant at 3%. The average inflation premium is 2.5% and the maturity risk premium takes the form: MRP = 0.1%(t-1), where t = number of years to maturity. If the liquidity premium is 0.5%, what is the default risk premium on the corporate bond?

a.) 0.7%

b.) 1.10%

c.) 1.00%

d.) 0.9%

Answers

Answer 1

Answer:

The correct option is b.) 1.10%.

Explanation:

This can be calculated using the following formula:

Default risk premium = Annual bond yield - Real risk-free rate (r*) - Average inflation premium - Maturity risk premium - Liquidity premium ............ (1)

Where;

Annual bond yield = 8%

Real risk-free rate (r*) = 3%

Average inflation premium = 2.5%

Maturity risk premium = 0.1% * (t - 1), where t = 10

Liquidity premium = 0.5%

Substituting the values into equation (1), we have:

Default risk premium = 8% - 3% - 2.5% - (0.1% * (10 - 1)) - 0.5%

Default risk premium = 8% - 3% - 2.5% - 0.9% - 0.5%

Default risk premium = 1.10%

Therefore, the correct option is b.) 1.10%.


Related Questions

Highbridge Community Life Center was a community hub and resource for the Bronx community that was founded in 1979 by two Catholic nuns. Brother Ed Phalen served as the Executive Director of the center for more than two decades. When he started considering retirement, he wondered what would happen to the organization and its leadership after he left. In order to plan for his eventual departure, Brother Phalen and the board of directors began the process of to identify a replacement for him.

Answers

The correct question is:

Highbridge Community Life Center was a community hub and resource for the Bronx community that was founded in 1979 by two Catholic nuns. Brother Ed Phalen served as the Executive Director of the center for more than two decades. When he started considering retirement, he wondered what would happen to the organization and its leadership after he left. In order to plan for his eventual departure, Brother Phalen and the board of directors began the process of _____________ to identify a replacement for him.

Answer:

Succession planning

Explanation:

Succession planning is the process by which new leaders in an organisation are identified and developed to adequately fill in the role of departing leaders.

This process is important as it prepares experienced staff to take up responsibility in cases of resignation, retirement, or death of a leader.

In the given instance Brother Ed Phalen served as the Executive Director of the center for more than two decades.

Considering his retirement he would need to get someone to take over leadership role from him.

So he and the the board of directors will need to begin a succession plan to identify his replacement

Why did the United States interfere in Iran in the 1950s? What was the result of their interference?

Answers

Answer:

Because Iran has oil and sells it to U.S. Iran minister doesn't want to do business with U.S. anymore.

Explanation:

The results were the U.S. would sponsor in Iran to replace existing gov't to be more western friendly.

Alicia loses her job part way through 2019. Her employer pays her wages of $15,450 up through her date of termination. After that, she received $3,400 of unemployment compensation from the state until she gets a new job for which she is paid wages of $3,000 through year end. Based on this information, Alicia’s gross income for 2019 is:_________.

Answers

Answer:

The right approach is "$21,850". A further solution is provided below.

Explanation:

The given values are:

Employer pays,

= $15,450

Unemployment compensation,

= $3,400

At the end of the year, she paid,

= $3,000

For year 2017,

Alicia Gross income will be:

= [tex]15450+3400+3000[/tex]

= [tex]21,850[/tex] ($)

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