Kop Corporation's 5-Year Bonds Yield 6

question 22

Multiple Choice

Kop Corporation's 5-year bonds yield 6.50%,and T-bonds with the same maturity yield 4.40%.The default risk premium for Kop's bonds is DRP = 0.40%,the liquidity premium on Kop's bonds is LP = 1.70% versus zero on T-bonds,the inflation premium (IP) is 1.50%,and the maturity risk premium (MRP) on 5-year bonds is 0.40%.What is the real risk-free rate,r*?

• A)2.04%
• B)2.14%
• C)2.26%
• D)2.38%
• E)2.50%

---

Definitions:

Entrepreneurial Talent

The unique set of skills, intuition, and insights that an entrepreneur possesses, which contributes to the successful creation and growth of businesses.

Accounting Profit

The profit a company has after deducting all its costs from its total revenues, according to standard accounting practices.

Production Costs

The total expense of manufacturing or producing goods, including materials, labor, and overhead expenses.

Marginal Product

The additional output that results from using one more unit of a particular input, holding other inputs constant.