Asked by Tanner Cereghino on May 11, 2024
Verified
Assume that for some period of time corporate bonds had an average rate of return of 5.4% while Treasury bills returned 2.8% and inflation averaged 2.7%. Given these assumptions, what is the risk premium on corporate bonds?
A) -0.1%
B) 0.1%
C) 2.6%
D) 2.7%
E) 2.8%
Risk Premium
The extra return expected by an investor for holding a risky asset, compared to a risk-free asset.
Corporate Bonds
Debt securities issued by corporations to finance their operations, expansion, or other spending needs, paying fixed or variable interest rates to investors.
Treasury Bills
Treasury Bills are short-term government securities with maturity periods of one year or less, often used by investors as a low-risk investment option.
- Grasp the concept of risk premium and how to calculate it.
Verified Answer
MB
Melanie BarrettMay 16, 2024
Final Answer :
C
Explanation :
The risk premium on corporate bonds is calculated by subtracting the return on a risk-free asset (Treasury bills) from the return on the risky asset (corporate bonds). Here, it's 5.4% (corporate bonds) - 2.8% (Treasury bills) = 2.6%.
Learning Objectives
- Grasp the concept of risk premium and how to calculate it.