TB MC Qu$.6-3$ Determinants of Interest Rate for Individual :

Determinants of Interest Rate for Individual Securities You are considering an investment in $30-$year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that $1-$year T$-$bills are currently earning $3\mathrm{.}60$ percent. Your broker has determined the following information about economic activity and the corporation's bonds:

Real interest rate $=2\mathrm{.}80\%$

Default risk premium $=2\mathrm{.}35\%$

Liquidity risk premium $=1\mathrm{.}00\%$

Maturity risk premium $=2\mathrm{.}10\%$

What is the inflation premium? What is the fair interest rate on the corporation's $30-$year bonds?

Multiple Choice

$80\%$ and $1\mathrm{.}81\%,$ respectively

$80\%$ and $8\mathrm{.}25\%,$ respectively