Principles of finance i -assignment

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6 Assignment “Chapter 5”

Principles of Finance I

Chapter 5


The risk-free of interest is 4% Inflation is expected to 2% this year and 4% during the next 2 years Assume that maturity risk premium is zero. What is the yield on 2 –years Treasury securities? What is the yield on 3 –years Treasury securities?


Question 5-5

A treasury bond that matures in10 years has a yield of 6%.  A 10-year corporate bond has a yield of 9%. Assume that the liquidity premium on the corporate bond is 0.5. What is the default risk premium on the corporate bond?



The real risk free rate is 3% and inflation is expected to be 3% for the next 2 years  A 2-year. Treasury Security Yield 6.3%. What is the maturity risk premium for the 2 years security?


Problem 5-12,

A 10-year, 12% semiannual coupon bond with a par value of $1,000 may be called in 4 years at call price of $1060. The bond sells for $1,100. (Assume that the bond has just been issued.)

a.       What is the bond’s yield to maturity?

b.      What is the bond’s current yield?

c.       What is the bond capital gain or loss yield?

d.      What is the bond’s yield to call?


Problem 5-20

Because of recession, the inflation rate expected for the coming year is only 3%.  However the inflation rate in the year 2 and thereafter is expected to constant at some level above 3%. Assume that the real risk free rate is r*=2% for all maturities and that there are no maturity premiums. If 3-year Treasury notes yield 2 percentage points more than 1-year notes. What inflation rate is expected after Year 1?



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