Question

Paragraph Styles Rolling Coast Inc. issued BBB bonds two years ago. These bonds provided a yield to maturity (YTM) of 11.5 percent. Long-term risk-free government bonds were yielding 8.7 percent at the time. The current risk premium on BBB bonds versus government bonds is half of what it was two years ago. If the risk- free long-term government bonds are currently yielding 7.8 percent, then at what interest rate should Rolling Coast expect to issue new bonds? Group of answer choices 7.8% 8.79 9.2% 10.2% 12.9%

Answer 1

Answer:

Explanation:

The risk premium two years back = 11.5 - 8.7 = 2.8 %

current risk premium = 2.8/2 = 1.4%

Current risk free bond yields 7.8 %

So Rolling Coast expected rate of interest on bonds = 7.8 + 1.4

= 9.2 %