Keys Corporation's 5-Year Bonds Yield 6

question 1

Multiple Choice

Keys Corporation's 5-year bonds yield 6.20% and 5-year T-bonds yield 4.40%.The real risk-free rate is r* = 2.5%,the inflation premium for 5-year bonds is IP = 1.50%,the liquidity premium for Keys' bonds is LP = 0.5% versus zero for T-bonds,and the maturity risk premium for all bonds is found with the formula MRP = (t − 1) × 0.1%,where t = number of years to maturity.What is the default risk premium (DRP) on Keys' bonds?

• A)1.17%
• B)1.30%
• C)1.43%
• D)1.57%
• E)1.73%

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Definitions:

Lithium

A chemical element used primarily in psychiatric medication to treat mood disorders such as bipolar disorder.

Bipolar Disorder

A disorder in mental health featuring intense fluctuations in mood from very elevated states (mania or hypomania) to very low states (depression).

Therapeutic Drugs

Medications used to treat, cure, or prevent disease and maintain health.

Bipolar Disorder

A condition affecting mental well-being, defined by pronounced changes in mood, with periods of intense happiness (mania or hypomania) and deep sadness (depression).