14. Use the following information to calculate the interest rate on a 7-year bond just issued by Becher Inc.

Inflation: first three years = 2.5%, year 4 and beyond = 4.5% (so you need to determine INFL for this bond from chapter 5)

Pure Rate = 2.0%

Maturity Risk Premium = zero for a 1-year maturity, increasing by .1% each year thereafter (for example, draw a timeline, the end of first year (point 1) the premium is zero, the end of the second year (point 2), the premium is 0.1, and so on).

Default Risk Premium = 1.5%

Liquidity Risk Premium = 1.0% for treasuries; 0.5% for Corporate bonds

Hint: K = Pure Rate + Inflation + MR + LR + DR Pure Rate + Inflation = Nominal risk-free rate = T-bill rate

a. 5.343%

b. 6.343%

c. 7.343%

d. 8.343%