## A \$25 000, 10% Bond Redeemable at Par on December

Answer for A \$25 000, 10% Bond Redeemable at Par on December 1, 2025, is Purchased for \$1 Only (Instant Download)

A \$25 000, 10% bond redeemable at par on December 1, 2025, is purchased on September 25, 2014, to yield 7.6% compounded semi-annually. Bond interest is payable semi-annually.

Q1) What is the Market Price?

Q2) What is the Accrued Interest?

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## Answer of The Real Risk Free Rate is 2.8%…

The real risk free rate is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next 5 years and 7% thereafter.

The maturity risk premium is determined from the formula : 0.1(t-1)%, where t is the security’s maturity. The liquidity premium (LP) on all Pellegrini Sourthern Inc.’s bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP):

Rating                   DRP

U.S. Treasury         —-

AAA                         0.60%

AA                           0.80%

A                             1.05%

BBB                        1.45%

1a. Pellegrini Southern Inc. issues 9-year, AA rated bonds. What is the yield on one of these bonds?Disregard cross-product terms; that is, if averaging is requried, use the arithmetic average.
a. 12.21%
b. 13.01%
c. 11.96%
​d. 5.45%

1b. Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true?
​a. Hiher inflation expectations increase the nominal interest rate demanded by investors.
​b. The yield on AAA-rated bond will be higher than the yield on a BB-rated bond.

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