Corporate Bonds For Private Investors
March 27th, 2011 | 
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Question: 1. A very small country's gross domestic product is $12 million.?
1. A very small country's gross domestic product is $12 million.
a. If government expenditures amount to $7.5 million and gross private domestic investment is $5.5 million, what would be the amount of net exports od goods and services?
1. Assume investors expect a 2.0 percent real rate of return over the next year. If inflation is expected to be 0.5 percent, what is the expected nominal interest rate for a one-year U.S.Treasury security?
3. A Ten-year U.S. Treasury bond has a 3.50 percent interest rate, while a same maturity corporate bond has a 5.25 percent interest rate. Real interest rates and inflation rate expectations would be the same for the two bonds. If a default risk premium of 1.50 percentage points is estimated for the corporate bond, determine the liquidity premium for the corporate bond.
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Corporate Bonds Yield To Maturity
Question: Can someone help me solve the following?
A company's 5-year bonds are yeilding 7.75% per year. The Treasury bonds with the same maturity are yielding 5.2% per year, and the real risk-free rate (r*) is 2.3%. The average inflation premium is 2.5%; and the maturity risk premium is estimated to be 0.1 x (t-1)%, where t = number of years to maturity. If the liquidity premium is 1%. What is the default risk premium on the corporate bonds.
Answer: Treasury bonds doesn't matter for this method/case, so just ignore it.
Assuming current rates represent risk-free rate plus sum of premiums and using simplified summation:
RE = RiskFree + Inflation + Maturity + Default + Liquidity
RE% = r* + π +MP+DP+LP = 2.3+2.5+(0.1(5-1))+DP+1 = 6.2%+DP
RE%=7.75%
7.75=DP+6.2
7.75 - 6.2 = DP
DP = 1.55%
Answ: Default risk premium on the corporate bonds is ≈ 1.55%
Investopedia Video: Introduction To Bonds