Question

Pandar Corp. issues 12-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average.

Answer 1

Answer:

8.58%

Explanation:

risk free rate 2.8%

premiums on Pandar Corp.'s bonds:

• maturity risk premium = 0.1 x (12 - 1)% = 0.1 x 11% = 1.1%
• liquidity premium on Pandar Corp.'s bonds = 0.55%
• default risk premium for AA bonds = 0.80%
• inflation premium (assuming 4% inflation for first 4 years and 3% for the rest of the years) = (4% x 4/12) + (3% x 8/12) = 3.33%

total premiums on Pandar Corp.s' bonds = 5.78%

yield on Pandar Corp-'s bonds = risk free rate + premiums = 2.8% + 5.78% = 8.58%