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    Yield Rate on a Year Corporate Bond Explanation

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    You read in the Wall Street Journal that a 30 day T-bill currently is yielding 8%. Your brother in law, a broker for Madoff Investments has given you the following estimates of current interest rate premiums.
    Inflation Premium 5%
    Liquidity Premium 1%
    Maturity Risk Premium 2%
    Default Risk Premium 2%

    Based on these data, what is the real risk free rate of return?
    What is the yield on a one year corporate bond with a $1000 face value that pays a 12% annual dividend if it was purchased for $950 and held until maturity?
    If you require a 20% yield on a one year corporate bond with a $1000 face value and a 12% annual premium what is the most you should be willing to pay for this bond?

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    Solution Preview

    Yield Rate on a Year Corporate Bond Explanation
    You read in the Wall Street Journal that a 30 day T-bill currently is yielding 8%. Your brother in law, a broker for Madoff Investments has given you the following estimates of current interest rate premiums.
    Inflation Premium 5%
    Liquidity Premium 1%
    Maturity Risk Premium 2%
    Default Risk Premium 2%

    Based on these data, what is the real risk free rate of return?
    The real risk free rate of return for a 30 day T-bill is 8% because T-bill does not have any premium as ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer what is the real risk free rate of return.

    $2.19

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