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II. (15 points) You are analyzing a 10-year bond issued by Tesla. The 1-year T-bills are currently yielding 3.0%. You have gathered the following information
II. (15 points) You are analyzing a 10-year bond issued by Tesla. The 1-year T-bills are currently yielding 3.0%. You have gathered the following information about the economic activity and the bond: Real risk-free rate = 1.5% Default risk premium = 2.5% Miquidity risk premium = 0.75% Special covenant premium = 0.10% Maturity risk premium - 2.25% Please answer the following two questions: 1. What is the expected inflation rate (i.e., the inflation premium)? inflation Premium = interest rate lyribills-theal risk free rate= 3.0% 1.5% = lng Is oo% 2. What is the required rate of return on the 10-year Tesla bond? -15% + 2.5%o + 0.15%. + 0-10% +2.25%+15%-15% a 4
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