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(Solution document) I need to show the step by step work but I am stuck on a few parts. The real risk-free rate of interest is 2 percent.


I need help with this question please. I need to show the step by step work but I am stuck on a few parts.


The real risk-free rate of interest is 2 percent. The market expects that inflation will be 3 percent each year for the next five years, and then will average 5 percent a year thereafter. The maturity risk premium is estimated to be MRPt = 0.1(t - 1) %.

 

           A 10-year corporate bond yields 8.6 percent. What is the yield on an 8-year corporate bond that has the same default risk and liquidity as the 10-year bond?

 







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