Respuesta :
The yield on a company's bonds, r is given by:
r = r* + drp + lp + ip + mrp
For Kop's bonds, r = 6.5%, drp = 0.4%, lp = 1.7%, ip = 1.5% and mrp = 0.4%.
Therefore, r* = 2.5%
The risk-free rate is 2.5%
Further Explanation:
Risk-free rate: It refers to the an of return that can be earned by the financial instrument which has no default risk.
Calculate the risk free rate:
Default risk premium (D) = 0.4 %
Liquidity premium (L) = 1.7%
Inflation premium (I) = 1.5%
Maturity risk premium (P) = 0.4%
Risk free rate = r
Yield on bond = r + D + L + I + P
6.5% = r + 0.4 % + 1.7% + 1.5% + 0.4%
r = 6.5% - 4%
r = 2.5%
Thus, the risk-free rate is 2.5%
Learn more:
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Answer details:
Grade: High School
Subject: Financial Management
Chapter: Risk and Return
Keywords: Op corporation's 5-year bonds yield 6.50%, and t-bonds with the same maturity yield 4.40%. The default risk premium for kop's bonds is 0.40%, the liquidity premium on kop's bonds is 1.70% versus zero on t-bonds, the inflation premium is 1.50%, and the maturity risk premium on 5-year bonds is 0.40%. The real risk-free rate, financial management, risk and return, bond rate, Yield on bond.
