25 Jul WHAT YIELD WOULD YOU PREDICT FOR EACH OF THESE TWO INVESTMENTS?
A. Suppose you are considering two possible invvestment opportunities a 12 year Treasury bond and Show more A. Suppose you are considering two possible invvestment opportunities a 12 year Treasury bond and a 7 year A rated corporate bond. The current real risk free rate is 4%. Inflation is expected to 2% for the next two years 3% for the following 4 years and 4% thereafter. The maturity risk premium is estimated by this formula MRP = 0.1%(t-1)%. The liquity premium for the corporate bond is estimated to be 0.7%. Finally you may determine the default risk premium given the companys bond rating from the default risk premium table.What yield would you predict for each of these two investments? (IF who ever helps me can provide me with each formula). B. Given the following Treasury Bond yield information fron the September 28 2001 Federal Reserve Statistical Rel construct a graph of the yield curve as of that date: periods: 3 months 6 months 1yr 2yr 3yr 5yr 7yr 10yr 20yr. Year: 0.25 0.50 1.00 2.00 3.00 5.00 7.00 10. 20. Yield: 1.16% 1.17% 1.25% 1.62% 2.05% 2.92% 3.50% 3.95% 4.96%. Construct a yield chart. C. The real risk free rate would be the same for the corporate and treasury bonds. Similarly without information to the contrary we would assume that the maturity and inflation premiums would be the same for bonds with the same maturities. However the corporate across maturities then we can use the LP and DRP premiums as determined above and add them to the T-bond yields to find the corporate yields. This procedure was used in the table below. Based on the information about the corporate bond that was given in Part A calculate yields and construct a new graph that shows both the Treasury and the corporate bonds. Thanks for any help! Show less
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