appropriate yield
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a) A corporation is planning to sell its 90-day commercial paper to investors offering an 8.4% yield. If the three-month T-bill's annualized rate is 7%, the default risk premium is estimated to be 0.6% and there is a 0.4% tax adjustment, what is the appropriate liquidity premium?
b) If due to unexpected changes in the economy the default risk premium increases to 0.8 percent, what is the appropriate yield to be offered on the commercial paper (assuming no other changes occur?
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This solution provides liquidity premium and yield.
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A) Yield = Real rate of interest + inflation premium + maturity risk + Default risk premium ...
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