HomeworkLib
Question

Stu wants to earn a real return of 3.4 percent on any bond he acquires. The...

Stu wants to earn a real return of 3.4 percent on any bond he acquires. The inflation rate is 2.8 percent. He has determined that a particular bond he is considering should have an interest rate risk premium of .27 percent, a liquidity premium of .08 percent, and a taxability premium of 1.69 percent. What nominal rate of return is Stu demanding from this particular bond?

Multiple Choice

7.38 percent

8.34 percent

8.74 percent

8.40 percent

7.19 percent

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

We know that,

Nominal rate of return = real return + inflation rate + interest rate risk premium + liquidity premium + taxability premium

substitute all the values in above formula,

we get,

Nominal rate of return = 3.4% + 2.8% + 0.27% + 0.08% + 1.69%

Nominal rate of return = 8.24%

Therefore, Nominal rate of return 8.24% is nearer to the value of option (b) i.e; 8.34%

0 0
Add a comment
Know the answer?
Add Answer to:
Stu wants to earn a real return of 3.4 percent on any bond he acquires. The...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • A bond yielded a real rate of return of 3.87 percent for a time period when...

    A bond yielded a real rate of return of 3.87 percent for a time period when the inflation rate was 3.75 percent. What was the actual nominal rate of return?

  • The market has an expected rate of return of 9.8 percent. The long-term government bond is...

    The market has an expected rate of return of 9.8 percent. The long-term government bond is expected to yield 4.5 percent and the U.S. Treasury bill is expected to yield 3.4 percent. The inflation rate is 3.1 percent. What is the market risk premium?

  • 4. Suppose that for all securities, the inflation risk premium is 2.15 percent and the real...

    4. Suppose that for all securities, the inflation risk premium is 2.15 percent and the real interest rate is 3.80 percent. A particular security's default risk premium is 1.54 percent and its liquidity risk premium is 0.78 percent. If the security has no special covenants and its maturity risk premium is 1.35 percent, what is the security's equilibrium rate of return? A. more than 10.50 percent B. more than 10.15 percent but less than 10.50 percent C. more than 9.80...

  • a corporations 10 years bond are currently yielding a return of 7.75 percent. the expected inflation...

    a corporations 10 years bond are currently yielding a return of 7.75 percent. the expected inflation premium is 3.0 percent annually and the real interest rate is expected to be 3.00 percent annually over the next 10 years. the liquidity risk premium on the corporation's bond is 0.50 percent. the maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year to maturity. what is the default risk premium on the corporation's...

  • Suppose you bought a 8.4 percent coupon bond one year ago for $907. The bond sells for $946 today. Required: (a) Assumi...

    Suppose you bought a 8.4 percent coupon bond one year ago for $907. The bond sells for $946 today. Required: (a) Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? (Do not include the dollar sign ($).) Total dollar return $ 84 % You've observed the following returns on Staverosky Corporation's stock over the past five years: -28.2 percent, 15.8 percent, 34.6 percent, 3.4 percent, and 22.4 percent. The average inflation...

  • my question is question 18, bond proce movements . thank you so much ! percent and...

    my question is question 18, bond proce movements . thank you so much ! percent and the on this investment 13. Inflation and Nominal Returns [LO4] Suppose the real rate is 1.9 percent an inflation rate is 3.1 percent. What rate would you expect to see on a Treasury bill 14. Nominal and Real Returns [LO4] An investment offers a total return of 115 cent over the coming year. Janice Yellen thinks the total real return on this in will...

  • he process of bond valuation is based on the fundamental concept that the current pice of...

    he process of bond valuation is based on the fundamental concept that the current pice of a security can be determined by calculating the present value of the cash flows that the security will generate in the future There is a consistent and predictable relationship between a bond's coupon rate, its par value, a bondholder's required return, and the bond's resulting intrinsic value. Trading at a discount, trading at a premium, and trading at par refer to particular relationships between...

  •   1. When it comes to financial matters, the views of Aristotle can be stated as:...

      1. When it comes to financial matters, the views of Aristotle can be stated as: a. usury is nature’s way of helping each other. b. the fact that money is barren makes it the ideal medium of exchange. c. charging interest is immoral because money is not productive. d. when you lend money, it grows more money. e. interest is too high if it can’t be paid back.  2. Since 2008, when the monetary base was about $800 billion,...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT