Mabuza Incorporated issued BBB bonds two years ago that provided a yield to maturity of 11.5 percent.Long-term risk-free government bonds were yielding 8.7 percent at that time.The current risk premium on BBB bonds versus government bonds is half what it was two years ago.If the risk-free long-term governments are currently yielding 7.8 percent, then at what rate should Mabuza expect to issue new bonds?

Question

Quizplus · Accepted Answer

To find the current required yield to maturity for Mabuza's bonds, we need to use the information given in the question:

- Two years ago, Mabuza issued BBB bonds with a yield to maturity of 11.5%. 
- At that time, risk-free government bonds had a yield to maturity of 8.7%. 
- Currently, risk-free government bonds have a yield to maturity of 7.8%. 
- The current risk premium on BBB bonds versus government bonds is half what it was two years ago.

Let's start by calculating the original risk premium:

BBB yield - risk-free yield = 11.5% - 8.7% = 2.8%

We know the current risk premium is half what it was two years ago, so:

Current risk premium = 2.8% / 2 = 1.4%

Now we can calculate the current required yield for Mabuza's BBB bonds:

Risk-free yield + current risk premium = 7.8% + 1.4% = 9.2%

Therefore, Mabuza should expect to issue new bonds with a yield to maturity of 9.2%.

The answer is (C) 9.2%.

Mabuza Incorporated Issued BBB Bonds Two Years Ago That Provided