Incs is DRP 120 versus zero for Tbonds and the maturity ris

Inc.\'s is DRP . 1.20% versus zero for T-bonds, and the maturity risk prenus for all bonds is tound with the ise te- ?) x ?.is, uhete e-haber of year to maturity. Mhat is the liquidity premium (LP) on Squire\'s bonds? /02018

Solution

bond yield = r + IP +DRP +MRP+LP

here,

yield = 6.85%

r= 2.75%

IP =1.65%

DRP = 1.20%.

MRP = (t-1)*0.1% => (5-1)*0.1%

=>0.4%.

LP is to be found out.

=>6.85% = 2.75%+1.65%+1.20%+0.40%+LP

=>LP =6.85%-6.00% =>0.85%.

Liquidity premium on squires bond =0.85%.