Share
Explore BrainMass

Analyzing risk

Can you help me get started with this assignment?

Suppose the following data on yields from holds:
3-month T-Bill 5.0%
30-year T-Bond 7.2%
30-year AAA Corporate 8.6%
30-year Municipal 6.02%

1. Assume the same risk for 30-year AAA Corporate bonds and 30-year Municipal Bonds. If you are indifferent between the two bonds what is your implied marginal tax rate?

2. What is the real risk free rate for 3-month if the inflation for 3 months is estimated as 3.0%?

3. What is the default risk premium on 30-year AAA corporate bonds? Assume there exists liquid markets for AAA corporate bonds.

4. What is the maturity risk premium on 30-year Treasury bonds? Assume the expected inflation for 3-month T-Bills and 30-year T-Bonds are the same.

Solution Preview

Suppose the following data on yields from holds:
3-month T-Bill 5.0%
30-year T-Bond 7.2%
30-year AAA Corporate 8.6%
30-year Municipal 6.02%

1. Assume the same risk for 30-year AAA Corporate bonds and 30-year Municipal Bonds. If you are indifferent between the two bonds what is your implied marginal tax rate?

The Corporate bond is taxed and the Municipal bond ...

Solution Summary

The solution explains the calculation of default risk premium, real risk free rate and maturity risk premium

$2.19