Real risk-free rate and average expected inflation rate

Assignment Help Financial Management

Reference no: EM131495565

Assume that the real risk-free rate is r* = 1% and the average expected inflation rate is 3% for each future year. The default risk premium and liquidity premium for Bond X are each 1%, and the applicable maturity risk premium is 2%. Which of the following statement is correct? A. Bond X is more likely a Treasury bond than a corporate bond. B. Bond X is more likely to have a 3-month maturity than a 20-year maturity. C. Bond X is more likely to have a 20-year maturity than a 3-month maturity. D. both a and b are correct. E. both a and d are correct.

Assume that interest rates on 20-year Treasury and corporate bonds are as follows: T-bond = 7.72%, A = 9.64%, AAA = 8.72%, BBB = 10.18%. The differences in rates among these issues were caused primarily by A. Tax effects. B. Default risk differences. C. Maturity risk differences. D. Inflation differences. E. Real risk-free rate differences.

Reference no: EM131495565

Questions Cloud

Financial accounting and managerial accounting : Financial Management is based on two disciplines: financial accounting and managerial accounting.

Vita-juice project analysis : Vita-Juice is considering jumping on the pomegranate and acai bandwagon by producing Vita-Poma and Vita-Acai beverages in 2018 (t=1).

Employee instead of an independent contractor : Why might a person working for a corporation prefer to be an employee instead of an independent contractor?

Growth rate in dividends is expected to be a constant : Bayou Okra Farms just paid a dividend of $3.65 on its stock. The growth rate in dividends is expected to be a constant 7 percent per year indefinitely.

Real risk-free rate and average expected inflation rate : Assume that the real risk-free rate is r* = 1% and the average expected inflation rate is 3% for each future year.

Issuing risk-free debt or risk-free preferred stock : Garnet Corporation is considering issuing risk-free debt, or risk-free preferred stock. what is cost of capital for risk-free preferred stock?

The extra payment in the alternative payment scheme : Determine the amount of the extra payment in the alternative payment scheme.

What is the current exchange rate of dollars for yen : If purchasing power parity holds, what is the current exchange rate of U.S. dollars for yen?

Why should you be concerned with retirement and estate : Personal Finance: Why should you be concerned with retirement and estate?

User Account

All Pages