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P6-1 Determinants of Interest Rate for Individual Securities You are considering an investment in 30-year bonds issued by Borro Corporation. The bonds have no special

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P6-1 Determinants of Interest Rate for Individual Securities You are considering an investment in 30-year bonds issued by Borro Corporation. The bonds have no special covenants. The Wall Street bourna/reprts that l-year T-bilsareyearsot rate) and expected one-year T-bllates over the following three years (le, currently earning 1.25percent. Your broker has determined the following information about economic activity and Borro Corporation bonds: P6-2 Unbiased Expectations Theory Suppose that the current one-year rate (one- years 2, 3, and 4, respectively) are as follows: R1-696, Eqn)-796, gn)-7596 g4n)-7.8596 Real interest rate 0.75% Liquidity risk premium : 0.50% Default Sk premium-1.15% Maturity nsk premium 1.75% Using the unbiased expectations the , calculate the current long-term rates for one-two, three and four-year mat nyTreasury ecu es. Plot the resulting yeld aurve (rate on the Y-axis, years on the Xaxis) a. What is the inflation premium? Note that Rate for a two year security Hint: Expected (IP)-i-Real Interest Rate Rate for a three year security b. What is the fair interest rate on Moore Corporation 30-year bonds? Hint: i infation premium+Real interest rate+ Defaultrisk premiumRat for four ear secuity Liquidity risk premium+Maturity risk premiurm

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