Hi Sir,
Crockett Corporation's 5-year bonds yield 6.35%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 3.60%, the default risk premium for Crockett's bonds is DRP = 1.00% versus zero for T-bonds, the liquidity premium on Crockett's bonds is LP = 0.90% 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 inflation premium (IP) is built into 5-year bond yields?
a. 0.68%
b. 0.75%
c. 0.83%
d. 0.91%
e. 1.00%
b
Basic equation: r = r* + IP + MRP + DRP + LP
rCrockett Not needed in this problem 6.35%
LP Not needed in this problem 0.90%
DRP Not needed in this problem 1.00%
rT-bond Required data 4.75%
r* Required data 3.60%
Years to maturity Required data 5
MRP = (t – 1) × (0.1) = 0.40%
IP = rT-bond ? r* ? MRP 0.75%
why is it that if i use the 6.35% = 1+3.6+0.4+0.9+IP
i didnt get the same answer? i got 0.45%
Ask the Tutor ACCA FM
Inflation Premium
Another doubt ..
A 20yr 9% semi annual coupon bond with a par value of $1000 may be called in 8years at a premium of 12%. The bond sells at $1260
iv) If a friend offers to sell you this bond at $1200, would you take up the offer?
(( part i it asked the YTM, i found out its 6.63%
part ii cap/gain loss yield, my answer is 0.51% loss
part iii YTC, 6.04% ))
12y ago#2Your first question is not in the F9 syllabus at all.
I realise that you are doing this for your university exams and not for ACCA, but you should ask your university lecturer about it.
12y ago#3Regarding your second question, if there is no other information at all, then the answer is that you would take up the offer. If the bond is trading at $1260 then this is regarded by the market as a fair price, and being able to buy it at $1200 must be worthwhile.
However, I think there is probably more information in the question than you have typed, and this could well affect things.
I am sorry sir. We are having study break before finals and couldn't ask lecturer anymore questions. Anyway,thank you for all your help all this while. You're great.
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