The real risk-free rate of return-corporate bonds

Assignment Help Financial Management

Reference no: EM131307932

Suppose economists have determined that the real risk-free rate of return is 3 percent and that inflation is expected to average 2.5 percent per year long into the future. A 1-year Treasury note offers a rate of return equal to 5.5 percent. You are evaluating two corporate bonds: (1) Bond A has a rate of return, rA, equal to 8 percent; (2) Bond B has a rate of return, rB, equal to 7 percent. Except for their maturities, these bonds are identical--Bond A matures in 10 years, whereas Bond B matures in 5 years. You have determined that both bonds are very liquid, and thus neither bond has a liquidity premium. a) Assuming that there is an MRP for bonds with maturities equal to 1 year or greater, compute the annual MRP. b) What are the DRP associated with Bond A and Bond B, respectively?

Reference no: EM131307932

Questions Cloud

Importance of the time value of money concepts : Define and discuss the importance of the time value of money concepts including compounding (future value), discounting (present value), and annuities. Why do organization leaders need to understand these concepts?

Net present value and internal rate of return : Define the various capital budgeting methods such as net present value (NPV), internal rate of return (IRR), and so on, and explain how they differ from one another. Identify which, if any, of the methods discussed might be superior to the others and..

Stock pays constant annual dividend and sells : How much are you willing to pay for one share of Jumbo Trout stock if the company just paid a $0.70 annual dividend, the dividends increase by 1.6 percent annually, and you require a 10 percent rate of return? A stock pays a constant annual dividend ..

Financial ratios you would probably be most interested : You are considering lending the Biqing Company $35,000 for seventy days. The financial ratios you would probably be MOST interested in are

The real risk-free rate of return-corporate bonds : Suppose economists have determined that the real risk-free rate of return is 3 percent and that inflation is expected to average 2.5 percent per year long into the future. A 1-year Treasury note offers a rate of return equal to 5.5 percent. You are e..

Provide the base-case and worst-case : A project has four activities (A, B, C, and D) that must be performed sequentially. The probability distributions for the time required to complete each of the activities are as follows: Activity Activity Time (weeks) Probability A 5 0.25 6 0.35 7 0...

Effective quarterly rate because of effect of compounding : You are looking at an investment that has an effective annual rate of 14.2 percent. What is the effective monthly return? Here we need to convert an EAR into interest rates for different compounding periods. Using the equation for the EAR, we get: No..

The firm expect to collect in the fourth quarter : Quiet Press has a 38-day accounts receivable period. The estimated quarterly sales for this year, starting with the first quarter are $1,200, $1,400, $1,900, and $1.200, respectively. How much does the firm expect to collect in the fourth quarter? As..

Calculate net present value for method : Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes over the next five years. Method one (implosion) is relatively low in risk for this business and will carry a 11 percent discount rate. Calculate net..

User Account

All Pages