Question

Mirtha Mudflat has sufficient funds to choose one of two investments. The same amount will be invested in either case. Choice one: ten year $100,000 5% Treasury bonds issued to yield 4% per annum, the market rate. Choice two: a risky bond of the same amount that has expected cash flows of $9,000 per year for the same period. What is the risk premium that makes Mirtha indifferent between the two investments?

Answer 1

risk premium is 4%

Step-by-step explanation:

given data

investment = $100000

rate = 5%

rate = 4 %

cash flow = $9000

to find out

What is the risk premium

solution

we know here invest is done in more return so risk is always here taht is risk premium and invest here $100000 with 5 % so

return of investment is $5000

so here rate of investment is 5 %

and

we have given same amount cash flows of $9000 per year

so rate of investment will be 9%

so here

risk premium will be 9% - 5%

so risk premium is 4%