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Suppose the real risk-free rate is 3.6%, the average future inflation rate is  2.3%, a maturity premium of 0.06% per year to maturity applies, i.e., MRP =  0.06%(t), where t is the years to maturity.  Suppose also that a liquidity premium  of 0.7% and a default risk premium of 0.7% applies to A-rated corporate bonds.   How much higher would the rate of return be on a 7-year A-rated corporate  bond than on a 5-year Treasury bond.  Here we assume that the pure  expectations theory is NOT valid.   

Drongo Corporation’s 3-year bonds currently yield 5.8 percent and have an inflation premium  of 2%.  The real risk-free rate of interest, r*, is 3 percent and is assumed to be constant.   The maturity risk premium (MRP) is estimated to be 0.1%(t – 1), where t is equal to the time to  maturity.  The default risk and liquidity premiums for this company’s bonds total 0.6 percent and are believed to be the same for all bonds issued by this company.  If the average inflation  rate is expected to be 2.8 percent for years 4, 5, and 6, what is the yield on a 6-year bond for  Drongo Corporation?

Assume the risk-free rate is 2% and that the required return on the market is 5.8%.   If a stock has a required rate of return of 6.1%, what is its beta?

Suppose the real risk-free rate is 2.7%, the average future inflation rate is  1.1%, a maturity premium of 0.08% per year to maturity applies, i.e., MRP =  0.08%(t), where t is the years to maturity.  Suppose also that a liquidity premium  of 0.9% and a default risk premium of 0.8% applies to A-rated corporate bonds.   How much higher would the rate of return be on a 10-year A-rated corporate  bond than on a 5-year Treasury bond.  Here we assume that the pure  expectations theory is NOT valid.   

Parr Paper’s stock has a beta of 1.06, and its required return is 7%.  Clover Dairy’s stock has a beta of 0.98.  If the risk-free rate is 2.4%, what is the  required rate of return on Clover’s stock?  (Hint: First find the market risk premium.)

T. Martell Inc.’s stock has a 36% chance of producing a 15% return, a  22% chance of producing a 10% return, and a 42% chance of producing a  -12% return. What is Martell’s expected return? 

Keys Corporation’s 5-year bonds yield 5%, and 5-year T-bonds yield 3.7%. The real risk-free rate is r* =  1.7%, the inflation premium  for 5 years bonds is  IP = 1.6%, the default risk premium for Keys’ bonds is DRP = 0.44% versus  zero for T-bonds, and the maturity risk premium for all bonds is found with  the formula  MRP =  (t – 1)*0.1%, where t = number of years to maturity.  What  is the liquidity premium (LP) on Keys’ bonds?

T. Martell Inc.’s stock has a 39% chance of producing a 5% return, a  19% chance of producing a 6% return, and a 42% chance of producing a  -5% return. What is Martell’s expected return? 

Given the following data, find the expected rate of inflation during the next year. ·         r* = real risk-free rate = 2.00%. ·         Maturity risk premium on 10-year T-bonds = 2%.  It is zero on 1-year bonds, and a linear relationship exists. ·         Default risk premium on 10-year, A-rated bonds = 1.5%. ·         Liquidity premium = 0%. ·         Going interest rate on 1-year T-bonds = 5.00%.

Keys Corporation’s 5-year bonds yield 6%, and 5-year T-bonds yield 4%. The real risk-free rate is r* =  2.2%, the inflation premium  for 5 years bonds is  IP = 1.4%, the default risk premium for Keys’ bonds is DRP = 0.44% versus  zero for T-bonds, and the maturity risk premium for all bonds is found with  the formula  MRP =  (t – 1)*0.1%, where t = number of years to maturity.  What  is the liquidity premium (LP) on Keys’ bonds?