Currently 90-day Treasury bills are trading at 7% per annum and inflation is running at 4.5%. A company is issuing bonds with a face value of $1,000 and an annual interest rate of 8% and maturity in 25 years. What can be concluded about the market's view of the company's level of riskiness?
A) It is risky because the term of the bond is 25 years.
B) It is not risky as the risk premium attached to the bond is 1%.
C) It is risky as the risk premium attached to the bond is 3.5%.
D) It is risky as the risk premium attached to the bond is 77% of the risk-free rate.
E) It is not risky as the risk premium attached to the bond is 14.3%.
Correct Answer:
Verified
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