Question

Lunar coast Incorporated issued BBB bonds two years ago that provided a yield to maturity of 12.5

percent. Long-term risk-free government bonds were yielding 8.5 percent at that time. The current
risk premium on BBB bonds versus government bonds is half of what it was two years ago. If the riskfree long-term government bonds are currently yielding 7.8 percent, then at what rate should Lunar
coast expect to issue new bonds

Answer 1

"9.80%" is the appropriate solution.

Step-by-step explanation:

The given values are:

Yield to maturity,

= 12.5%

Risk free gov. bond,

= 8.5%

Long terms gov. bond,

= 7.8%

Now,

The current speed between bonds such as BBB as well as government will be:

=
`(12.5-8.5)/(2)`

=
`(4)/(2)`

=
`2.00 \ percent`

hence,

The expected rate will be:

=
`7.8+2.00`

=
`9.80 \ percent`