Mini Case. Chapter 2 (similar to) Question Help On the first day of your summer internship, you've been assigned to work with the Chief Financial Officer (CFO) of San Blas Jewels Inc. Not knowing how well trained you are, the CFO has decided to test your understanding of interest rates. Specifically, she asks you to provide a reasonable estimate of the nominal interest rate for a new issue of Aaa-rated bonds to be offered by SanBlas Jewels Inc. The final format that the chief financial officer of SanBlas Jewels has requested is that of equation (2-1) in the text: Nominal interest rate = real risk-free interest rate + inflation premium + default-risk premium + maturity-risk premium + liquidity-risk premium Some agreed-upon procedures related to generating estimates for key variables in equation (2-1) follow. a. The current 3-month Treasury bill rate is 2.85 percent, the 30-year Treasury bond rate is 5.27 percent, the 30-year Aaa-rated corporate bond rate is 6.69 percent, and the inflation rate is 2.02 percent. b. The real risk-free rate of interest is the difference between the calculated average yield on 3-month Treasury bills and the inflation rate. c. The default-risk premium is estimated by the difference between the average yields on Aaa-rated bonds and 30-year Treasury bonds. d. The maturity-risk premium is estimated by the difference between the average yields on 30-year Treasury bonds and 3-month Treasury bills. What is the real risk-free interest rate? 0.83 % (Round to two decimal places.) What is the inflation premium? 2.02% (Round to two decimal places.) What is the default-risk premium? % (Round to two decimal places.) Enter your answer in the answer box and then click Check Answer. ? parts remaining Clear All Check Answer Nominal interest rate = real risk-free interest rate + inflation premium + default-risk premium + maturity-risk premium + liquidity-risk premium Some agreed-upon procedures related to generating estimates for key variables in equation (2-1) follow. a. The current 3-month Treasury bill rate is 2.85 percent, the 30-year Treasury bond rate is 5.27 percent, the 30-year Aaa-rated corporate bond rate is 6.69 percent, and the inflation rate is 2.02 percent. b. The real risk-free rate of interest is the difference between the calculated average yield on 3-month Treasury bills and the inflation rate. c. The default-risk premium is estimated by the difference between the average yields on Aaa-rated bonds and 30-year Treasury bonds. d. The maturity-risk premium is estimated by the difference between the average yields on 30-year Treasury bonds and 3-month Treasury bills. e. SanBlas Jewels' bonds will be traded on the New York Bond Exchange, so the liquidity-risk premium will be slight. It will be greater than zero, however, because the secondary market for the firm's bonds is more uncertain than that of some other jewelry sellers. It is estimated at 3 basis points. A basis point is one one-hundredth of 1 percent. Now place your output into the format of equation (2-1) so that the nominal interest rate can be estimated and the size of each variable can also be inspected for reasonableness and discussion with the CFO. What is the real risk-free interest rate? 0.83% (Round to two decimal places.) What is the inflation premium? 2.02% (Round to two decimal places.) What is the default-risk premium? % (Round to two decimal places.) Enter your answer in the answer box and then click Check Answer. ? parts remaining Clear All Check
