P6-1 Determinants of Interest Rate for Individual SecuritiesYou are considering an investment in 30-year bonds issued by Borro Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 2.50 percent. Your broker has determined the following information about economic activity and Borro Corporation bonds:

Real interest rate = 1.00% Default risk premium = 1.25% Liquidity risk premium = 0.75% Maturity risk premium = 0.50%

a. What is the inflation premium?

Expected (IP) = i-Real Interest Rate

b. What is the fair interest rate on Moore Corporation 30-year bonds?

ij* = inflation premium + Real interest rate + Default risk premium + Liquidity risk premium + Maturity risk premium