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4. (Example 5-4) The interest rate outlook for Monsato Corporation., a large, financially sound company, is reflected in the following information: (1) The pure rate
4. (Example 5-4) The interest rate outlook for Monsato Corporation., a large, financially sound company, is reflected in the following information: (1) The pure rate of interest is 1 % (2) Inflation is expected to increase in the future from its current low level of 1%. Predicted annual inflation rates follow: Year Inflation Rat 1%+' 2%+' 3%+' 4 5-20 5%+' 41 (3) The default risk premium will be. 1% for one-year debt, but will increase. 1% for each additional year ofterm to a maximum of 1% (4) The liquidity premium is zero for one and two-year debt, .500 for three-four-, and five-year terms and 1 % for longer issues (5) The maturity risk premium is zero for a one-year term and increases by .2% for each additional vear of term to a maximum of 2%. Use the interest rate model to estimate market rates on the firm's debt secuities of the following terms: 1 to 5 years, 10 years, and 20 years- +
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