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Submitted to
Ms. Eliza Rose G. Juane
Submitted by:
Queene G. Balaoro
STEP 3 IP + MRP + r*
YR 1: rRF = 3% + 5% + 0% = 8%
YR 10: rRF = 3% +7. 5% + 0.9% = 11.4%
YR 20: rRF = 3% + 7.75% + 1.9% = 12.65%
F. At any given time, how would yield curve facing AAA rated company compare
with yield curve for US treasury securities? At any given time, how would yield curve
facing BB rated company compare with yield curve for US treasury securities?
Draw graph.
ANSWER:
Corporate yield curve will always lie above government yield curve and the riskier
the corporation the higher its yield curve
G. What is pure expectations theory? What does it imply about term structure of
interest rate?
ANSWER:
Theory assumes that investors establish bond prices and interest rates strictly on
the basis of expectations for interest rates, meaning theyre indifferent with
respect to maturity in the sense that they dont view long term bonds as being
riskier than short term bonds. If this were true, then MRP would be zero and long
interest rate would simply be the weighted ave of current and expected future
short term interest rates. If this theory is correct, yield curve can be used to back
out expected future interest rates