Kelly Inc's 5 yr bond yield 7.50% and 5 yr T Bonds yield 4.50%.The risk free rate is r*=2.5, the default risk premium for kelly bonds is DRP=0.40%, the liquity premium on kelly's bond is LP=2.6% versus zero on T-bonds, and the inflation premium ( IP) is 1.5%. What is the Maturity risk premium( MRP) on all 5 yr bonds?
To calculate the Maturity Risk Premium (MRP) on all 5-year bonds, we need to subtract the risk-free rate from the yield of the Kelly Inc bond. The formula to calculate the MRP is as follows:
MRP = Yield on Kelly Inc Bond - Risk-Free Rate
Given the following information:
- Yield on Kelly Inc's 5-year bond = 7.50%
- Risk-Free Rate (r*) = 2.5%
Using the formula, we can calculate the MRP:
MRP = 7.50% - 2.5% = 5.00%
Therefore, the Maturity Risk Premium on all 5-year bonds is 5.00%.