Question
A corporate bond has a nominal interest rate of 12 percent. this bond is not liquid and requires a 2 percent liquidity premium (LP). The
A corporate bond has a nominal interest rate of 12 percent. this bond is not liquid and requires a 2 percent liquidity premium (LP). The bond is of low quality and, thus, has a default risk premium (DRP) of 2.5 percent. The bond has a remaining life of twenty-five years, resulting in a maturity risk premium (MRP)of 1.5 percent.
a. Estimate the nominal interest rate on a Treasury bond.
b. What would be the inflation premium on the Treasury bond if investors required a real rate of interest of 2.5 percent?
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Fundamental accounting principle
Authors: John J. Wild, Ken W. Shaw, Barbara Chiappetta
21st edition
1259119831, 9781259311703, 978-1259119835, 1259311708, 978-0078025587
