How Would I Calculate This???anyone Have The Formula?
Monday, July 12th, 2010 at
11:15 am
Assume that interest rates on 20-year Treasury and corporate bonds are as follows:
T-bond = 7.72% A = 9.64%
AAA = 8.72% BBB = 10.18%
The differences in rates among these issues were caused primarily by
A Tax effects.
B Default risk differences.
C Maturity risk differences.
D Inflation differences.
E Real risk-free rate differences
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The answer is B Default Risk Differences.
The formula to calculate this would be:
Interest rate = risk-free rate + default risk + systematic risk
the risk-free rate and systematic risk are constant for all the different bonds.
The default risk is different. The T-bond is considered to have the lowest amount of risk for default and therefore has the lowest rate.
This is followed by the AAA, A and BBB.