Kay Corporation's 5-year bonds yield 5.90% and 5-year T-bonds yield 4.40%.The real risk-free rate is r* = 2.5%,the inflation premium for 5-year bonds is IP = 1.50%,the default risk premium for Kay's bonds is DRP = 1.30% versus zero for T-bonds,and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) $\times$
0)1%,where t = number of years to maturity.What is the liquidity premium (LP)on Kay's bonds?

Question

Quizplus · Accepted Answer

The yield on Kay's bonds can be broken down into the real risk-free rate (r*), inflation premium (IP), default risk premium (DRP), maturity risk premium (MRP), and liquidity premium (LP). The formula for the yield is: yield = r* + IP + DRP + MRP + LP. For Kay's bonds, the yield is 5.90%. The MRP for 5-year bonds is calculated as (5-1) * 0.1% = 0.4%. Therefore, LP can be calculated as: 5.90% - (2.5% + 1.5% + 1.3% + 0.4%) = 0.20%.

Kay Corporation's 5-Year Bonds Yield 5 ×\times× 0)1%,where T = Number of Years to Maturity

Kay Corporation's 5-Year Bonds Yield 5 $\times$ 0)1%,where T = Number of Years to Maturity