What is the default risk premium on bonds

Assignment Help Financial Management
Reference no: EM13911073

Koy Corporation's 5-year bonds yield 7%, and 5-Year T-bonds yield 5.15%. The real risk-free rate is r*=3%, the inflation premium for 5=year bonds is IP=1.75%, the liquidity premium for Koy s bonds is LP=.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP=(t-1)*.1%, where t=number of years to maturity. What is the default risk premium (DRP) on Koy's bonds?

B. 6.6 is the answer but how did we get this answer?

Reference no: EM13911073

Questions Cloud

Stock split-dividend per share : After a 2-for-1 stock split, Strasburg Company paid a dividend of $1.9 per new share, which represents a 9% increase over last year's pre-split dividend. What was last year's dividend per share?
What steps can an organization take to overcome : Identify five major global issues that deter the spread of e-commerce. What steps can an organization take to overcome these barriers?
Save money to meet three objectives-retirement income : Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with retirement income of $27,500 per month for 25 years, with the first payment received 30 years and 1 month from now.  If he ca..
Discuss the use of e-commerce to improve spending : Discuss the use of e-commerce to improve spending on manufacturing, repair, and operations (MRO) of goods and services.
What is the default risk premium on bonds : Koy Corporation's 5-year bonds yield 7%, and 5-Year T-bonds yield 5.15%. The real risk-free rate is r*=3%, the inflation premium for 5=year bonds is IP=1.75%, the liquidity premium for Koy s bonds is LP=.75% versus zero for T-bonds, and the maturity ..
Polaris uses a time ticket for some employees : What is the difference between a clock card and a time ticket?
Do you think that mobile commerce is a significant : The volume of mobile commerce in the United States is expected to reach only about 7 percent of total B2C sales by 2016. Do you think that mobile commerce is a significant capability for shoppers? Why or why not?
What is the present value of a five period annuity : What is the present value of a five period annuity of $1,000 if the interest rate is 10% and the first payment is made today?
Project for the ultimate recreational tennis racket : You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $480 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2;..

Reviews

Write a Review

Financial Management Questions & Answers

  Find the present value of this perpetuity

A perpetuity will make payments of $50,000 every third year, with the first payment occurring three years from now. The effective annual interest rate is 8%. Find the present value of this perpetuity.

  Volume variance with a column for Routine Services

Greenview Hospital operated at 120% of normal capacity in two of its departments during the year. It operated 120% times 20,000 normal capacity direct labor nursing hours in routine services and it operated 120% times 20,000 normal capacity equipment..

  What is the price of the bonds as percentage of pars

Ramstucky Corp bonds just paid their annual coupon of 4%. They mature in 6 years. The required rate of return on the bonds is 5%. So it’s a $10,000 bond selling for $9,000. The call price of the bonds is 102, but they are not callable until after the..

  What is the portfolios beta

Bob has $200,000 invested in a 2-stock portfolio. $120,000 is invested in Stock A and the remainder is invested in Stock B. Stock A's beta is 0.75 and B’s beta is 1.25. What is the portfolio's beta?

  Investors anticipate-what is the current stock price

One year from today, investors anticipate that Groningen Distilleries, Inc, stock will pay a dividend of $3.25 per share. After that, investors believe that the dividend will grow at 20% per year for three years before settling down to a long-run gro..

  What is expected percentage change in the value of the bond

If a bond has duration of 12.25 years, and interest rates are expected to decline by 1.5 percent, what is the expected percentage change in the value of the bond?

  Interest rate or payment of the same type of investment

Find the value of an investment (perpetuity) that pays you $6,000 annually forever but returns no principle. Find the interest rate or payment of the same type of investment.

  Pre-tax annual return-worthwhile to make market in t-bills

A government securities dealer needs to make a 7% pre-tax annual return on $10 million of capital employed to make it worthwhile to make a market in T-Bills. If the bid discount on $10,000 face value, ninety day T-Bills is 3.50%, and the dealer can e..

  How much should he set aside today for the purchase

Stephen plans to purchase a car 3 years from now. The car will cost $45,148 at that time. Assume that Stephen can earn 9.95 percent (compounded monthly) on his money. How much should he set aside today for the purchase?

  Cost of trade credit

A large retailer obtains merchandise under the credit terms of 3/10, net 35, but routinely takes 65 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer's e..

  Bond issuer will not be able to make timely payments

Which of the following terms is the chance that the bond issuer will not be able to make timely payments?

  The binominal model-what is the options value

A current price of a stock is $22 and the end of one year its price will be either $27 or $17. The annual risk free rate is 6.0% based on daily compounding. A 1-year call option on the stock with an exercise price of $22 is available. Based on the bi..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd