Question

A treasury bond that matures in 10 years has a yield of 2.0%. A 10-year bond issued by Dahlia Corporation has a yield of 8% and a default risk premium of 2.7%. What is the liquidity premium of the corporate bond?

		4.70%
		12.70%
		None of these
		3.30%
		5.30%

Suppose that Raven Inc stock is expected to pay a dividend of $1.50 per year. If Raven’s stock has a beta 2.1 and the current stock price is $46, what is the expected return for this stock?

		None of these
		4.57%
		6.85%
		3.26%
		7.83%

Answer 1

Ans: Since we know that the Treasury bond given in the question is risk-free. Therefore it will not give risk premium but the corporate bonds will have to give risk premium because it is risky.

Now the Risk Premium for the corporate bond will be given by (Corporate bond return - Risk-free rate)

= 8% - 2% = 6%.

Risk premium is 6% and the default risk Premium is 2.7% as it is given in the question.

Now the liquidity premium will be given by(Risk Premium - Default Risk premium)

= 6% - 2.7% = 3.30%.

Ans:- As per this question the required return on the stock will be given by (Dividend/Current Stock price)

= 1.50/46 =0.0326 = 3.26% (approx).