Chapter 6 question 2

You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.35 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:

Real risk-free rate = 0.65%

Default risk premium = 1.25%

Liquidity risk premium = 0.70%

Maturity risk premium = 1.85%

a.	What is the inflation premium? (Round your answer to 2 decimal places.)

Expected IP

%

b.	What is the fair interest rate on Moore Corporation 30-year bonds? (Round your answer to 2 decimal places.)

Fair interest rate

%