Explain the concept of the risk–return relationship.
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The relationship between required return rate and risk is identified as the risk–return relationship. This is a kind of positive relationship since the additional risk involved; most people will demand higher the required return rate. Risk aversion describes the positive risk–return relationship. It also defines why risky junk bonds have a higher market interest rate than the risk-free U.S. Treasury bonds.
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Your firm have just issued five year floating-rate notes indexed to six-month U.S. dollar LIBOR plus 1/4%. Describe the amount of first coupon payment your firm will pay per U.S. $1,000 of face value, if six-month LIBOR is at present 7.2%?Solution:
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