The real risk-free rate (r*) is 2.8% and is expected to remain constant.
Inflation is expected to be 8% per year for each of the next five years and
7% thereafter. The maturity risk premium (MRP) is determined from the
formula: 0.1(t – 1)%, where t is the security’s maturity. The liquidity
premium (LP) on all Pandar Corp.’s bonds is 0.55%. The following table
shows the current relationship between bond ratings and default risk
premiums (DRP): Rating Default Risk Premium U.S. Treasury — AAA 0.60% AA
0.80% A 1.05% BBB 1.45% A. Pandar Corp. issues seven-year, AA-rated
bonds. What is the yield on one of these bonds? Disregard cross-product
terms; that is, if averaging is required, use the arithmetic average.
12.46% 11.86% 11.91% 4.75% B. Based on your understanding of the
determinants of interest rates, if everything else remains the same, which
of the following will be true? The yield on U.S. Treasury securities
always remains static. An AAA-rated bond has less default risk than a
3. Calculating interest rates
with any paper
Looking for someone to write your essay in 2 hours? Assignment123 can help. Hire an expert writer to tackle your essay paper and get it done quickly and efficiently. You can also order a custom essay, buy essay online, or get essay help from our team of experienced writers.