Question
Risk Premiums: Eleanor is attempting to find the nominal rate of interest for each of two securities, A and B, issued by different firms at
Risk Premiums: Eleanor is attempting to find the nominal rate of interest for each of two securities, A and B, issued by different firms at the same point in time. She has gathered the following data.
Characteristic Security A Security B
Time to maturity 3 years 15 years
Inflation premium 9.0% 7.0%
Risk Premium for:
Liquidity risk 1.0% 1.0%
Default risk 1.0% 2.0%
Maturity risk 0.5% 1.5%
Other risk 0.5% 1.5%
If the real rate of interest is currently 2%, find the risk-free rate of interest applicable to each security.
Find the total risk premium attributable to each security
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