Question
Determinants of Interest Rate for Individual Securities You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants.
Determinants of Interest Rate for Individual SecuritiesYou are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants.The Wall Street Journalreports that 1-year T-bills are currently earning 3.50 percent. Your broker has determined the following information about economic activity and the corporation bonds:
Real interest rate = 3.25%
Default risk premium = 3.25%
Liquidity risk premium = 1.45%
Maturity risk premium = 3.00%
What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?
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