this is finance assignment….it is short assignment estimating the free risk rate and risk premium rate based on the data screenshots at the end of the document…look at the end of the document to find the selected data …it is due in 8 hrs

FIN630 HW3:

Risk-Free Rate and Market Risk Premium


To complete this assignment, you must

1. Estimate the risk-free rate in

a. US dollars,

b. Euros and

c. Mexican Pesos.

If there is no risk-free asset in the currency, you must estimate the risk-free rate in three different ways.

2. Estimate the market risk premium for investments in

a. The US,

b. Germany, and

c. Mexico.


Note: The data here is from September 13, 2018


1. Estimate the 10-year risk-free rate in U.S. Dollars, in Euros, and in Mexican Pesos.

I have attached some Bloomberg screen shots and other data to help you. Please refer to the Moody’s website (link on Blackboard under Data) for bond ratings. If there are no Aaa rated bonds available in a currency, estimate the risk-free rate in three different ways:

1. Using foreign and sovereign debt yields

2. Using CDS spreads

3. Using an estimate based on ratings.


In other words, I am looking for 1 number for Dollars, 1 number for Euros, and 3 numbers for Pesos. Be clear where you are getting the numbers you use and the calculations you do to get your final answers.


2. Then estimate the market risk premium for an investment in the U.S., in Germany, and in Mexico.

To help with this, I have attached estimates of the volatility of the stock and bond markets in Mexico. The current implied market risk premium (based on the S&P500) is 5.04%.


Here is some World Bond Market data:

Unless otherwise indicated (for Brazil, Argentina, and Mexico) these bonds are issued in the local currency.



Here is some info on Peso-denominated Mexican bonds. You can assume that dollar-denominated and peso-denominated Mexican bonds have the same rating.


Here is some 10-year Credit Default Swap (CDS) Market data:


Note: The “Spread” column gives the current price in basis points for the CDS. A basis point is 1/100 of a percent.




Here is a table of approximate default spreads by rating.

Rating Default spread in basis points
Aaa 0
Aa1 41
Aa2 51
Aa3 62
A1 72
A2 87
A3 123
Baa1 164
Baa2 195
Baa3 226
Ba1 256
Ba2 308
Ba3 369
B1 462
B2 564
B3 667
Caa1 769
Caa2 923
Caa3 1025
Ca 1230



Assume that the Mexican equity market has a standard deviation of 32% and the Mexican bond market has a standard deviation of 20%.

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