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 Securities You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.60 percent. Your broker has determined the following information about economic activity and the corporation's bonds:
Real interest rate = 3.05%
Default risk premium = 2.85%
Liquidity risk premium = 1.25%
Maturity risk premium = 2.60%
What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started