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On the first day of your summer internship, you've been assigned to work with the Chief Financial Officer (CFO) of SanBlas Jewels Inc. Not knowing
On the first day of your summer internship, you've been assigned to work with the Chief Financial Officer (CFO) of SanBlas 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 2.81 percent, the 30-year Treasury bond rate is 5.41 percent, the 30-year AAA-rated corporate bond rate is 6.69 percent, and the inflation rate is 2.27 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. What is the real risk-free interest rate? % (Round to two decimal places.)
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