Morningstar Corp.s eight-year bonds are currently yielding a return of 6.85 percent. The expected inflation premium is
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Morningstar Corp.’s eight-year bonds are currently yielding a return of 6.85 percent. The expected inflation premium is 1.15 percent annually and the real risk-free rate is expected to be 2.25 percent annually over the next eight years. The default risk premium on Morningstar’s bonds is 1.35 percent.
The maturity risk premium is 0.50 percent on two-year securities and increases by 0.05 percent for each additional year to maturity. Calculate the liquidity risk premium on Morningstar’s eight-year bonds.
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