In the context of bonds, the material in this course has defined the components of the required rate of return. Which of the following BEST describes the components of the required rate of return?

In other words, if an investor in a bond is going to required a specific return from a bond, which of the following BEST describes the demands they have for a return?

Multiple Choice

• The time value of money during an investment period, the expected rate of inflation duruing the investment period, the risk involved

• Real rate of return and premiums for inflation risk, interest rate risk, default risk, and liquidity risk

• Real rate of return and a premium for inflation risk

• Premiums for interest rate risk, default risk, and liquidity risk