On the first day of your summerinternship, you've been assigned to work with the Chief Financial Officer(CFO) of SanBlas Jewels Inc. Not knowing how well trained youare, 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 ofAaa-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 thetext:

Nominal interest rate equals Start 2 By 1 Matrix 1st Row 1st Column real risk dash free interest rate plus inflation premium plus default dash risk premium 2nd Row 1st Column plus maturity dash risk premium plus liquidity dash risk premium EndMatrix

Nominalinterestrate=realrisk-freeinterestrate+inflationpremium+default-riskpremium+maturity-riskpremium+liquidity-riskpremium

Someagreed-upon procedures related to generating estimates for key variables in equation(2-1) follow.

a. The current3-month Treasury bill rate is 2.79

2.79 percent, the30-year Treasury bond rate is 5.54

5.54 percent, the30-year Aaa-rated corporate bond rate is 6.88

6.88 percent, and the inflation rate is 2.03

2.03 percent.

b. The realrisk-free rate of interest is the difference between the calculated average yield on3-month Treasury bills and the inflation rate.

c. Thedefault-risk premium is estimated by the difference between the average yields onAaa-rated bonds and30-year Treasury bonds.

d. Thematurity-risk premium is estimated by the difference between the average yields on30-year Treasury bonds and3-month Treasury bills.

e. SanBlasJewels' bonds will be traded on the New York BondExchange, so theliquidity-risk premium will be slight. It will be greater thanzero, however, because the secondary market for thefirm's bonds is more uncertain than that of some other jewelry sellers. It is estimated at 6

6 basis points. A basis point is oneone-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.

___% (Round to two decimalplaces.)

What is thematurity-risk premium?

nothing

___% (Round to two decimalplaces.)

What is theliquidity-risk premium?

nothing

___% (Round to two decimalplaces.)

What is the nominal interestrate?

nothing

___% (Round to two decimalplaces.)