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17 May, 16:43

Op corporation's 5-year bonds yield 6.50%, and t-bonds with the same maturity yield 4.40%. the default risk premium for kop's bonds is drp = 0.40%, the liquidity premium on kop's bonds is lp = 1.70% versus zero on t-bonds, the inflation premium (ip) is 1.50%, and the maturity risk premium (mrp) on 5-year bonds is 0.40%. what is the real risk-free rate, r*?

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  1. 17 May, 16:49
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    The yield on a company's bonds, r is given by: r = r * + drp + lp + ip + mrp For Kop's bonds, r = 6.5%, drp = 0.4%, lp = 1.7%, ip = 1.5% and mrp = 0.4%. Therefore, r * = 2.5%
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