(Interest

rate

determination)

You're looking at some corporate bonds issued by Ford, and you are trying to determine what the nominal interest rate should be on them. You have determined that the real risk-free interest rate is

3.2 %3.2%,

and this rate is expected to continue on into the future without any change. In addition, inflation is expected to be constant over the future at a rate of

2.3 %2.3%.

The default-risk premium is also expected to remain constant at a rate of

1.6 %1.6%,

and the liquidity-risk premium is very small for Ford bonds, only about

0.02 %0.02%.

The maturity-risk premium is dependent upon how many years the bond has to maturity. The maturity-risk premiums are shown in the popup window:

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. Given this information, what should the nominal rate of interest on Ford bonds maturing in 0-1 year, 1-2 years, 2-3 years, and 3-4 years be?

BOND MATURES IN:

MATURITY-RISK PREMIUM:

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0-1 year

0.070.07%

1-2 years

0.250.25%

2-3 years

0.700.70%

3-4 years

0.950.95%

The nominal rate of interest on Ford bonds maturing in 0-1 year should be

nothing %.

(Round to two decimal places.)

PLEASE ANSWER THE QUESTIONS CORRECTLY AND FULLY! FOR 0-1 year, 1-2 years, 2-3 years, and 3-4 years ALL FOUR YEARS