On the first day of your summer internship. youve been assignod to work with the Chief Financial Otficer (CFO) of SanBlas Jewels Inc. Not knowing how well trained you are, the CFO has docided to test your understanding of interest rates. Speclically, she asks you to provide a reasonable estimate of the nominal interest rate for a new issue of AAA-rated bonds to be oftered by SanBlas Jewels Inc. The final format that tho chiof financial officer of SanBlas Jewels has requested is that of equation (21) in the toxt: Nominalinterestrate=realrisk-freeinterestrate+intlationpremium+defaultriskpremium.+maturity-riskpremium+liquidity-iskpremium Some agreed-upon procedutes related to generating estimates for kay variables in equation (21) follow. a. The current 3-month Treasury bal rate is 2.73 percent, the 30-yoar Treasury bond rate is 5.39 percont, the 30-year AAA-rated corporate bond rate is 6.87 percent, and the inflation rate is 2.23 porcent. b. The roal rikkfree tate of interest is the sitference between the cavoulated average yiedd on 3-month Treasury bils and the infiation rate. Some agreed-upon procedures relaled to generating estimales for key variables in equation (2-1) follow. 3. The current 3-month Treasury bill rate is 2.73 percent, the 30-year Treasury bond rale is 539 percent, the 30-year AAA-rated corporate bond rate is 6 8 percent, ard the inflaticn rate is 223 percont. b. The real risk-free rate of interest is the differenco between the calculated avorage yiold on 3-month Treasury bills and the infation rade c. The dofaut-risk premium is estimated by the dilerence between the average yiolds on AAfitasod bonds and 30 -year Treasury bonds. d. The maturity-nisk premium is estimatod by the difference betwoen the averago yields on 30-year Treasury bonds and 3 -monch Treasury bills the socondary merket for the firm's bonds the New Yock Hond Exchange, so the liquidty-risk premeum wit be sight, it will be greater than zero, howevef, becieuse orverundrecth 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 see of each variable can aso be inspected for reasonableness and discussion with the CFO What is the real risk-free interest rate? (Round to two decimal places.) What is the inflation premium? (Round to two decimal places.) What is the default-risk premium? 2.88% (Round to two decimal places.) What is the liquidity-risk premium? (Round to two decimal places.) What is the nominal interest rate? (Round to two decimal places.)
