Voice River, Inc. provides media-on-demand services via the Internet.Management has been studying current interest rates.A lender is willing to make a two-year loan to Voice River at a 13 percent annual interest rate.The U.S. government is currently paying 8 percent annual interest on its two-year securities.

A.If the real rate of interest is expected to be 3 percent annually, what is the inflation premium expected at this time?

B.What is the amount of the total risk premium that Voice River will have to pay?

C.If a 1 percent liquidity premium is built into the 13 percent rate, what is the default risk premium on the loan?

2.[Maturity and Default Risk Premiums]

Following is interest rate information currently being observed by the Electronic Publishing Corporation.

One-year U.S. government securities3.5%

One-year bank loans 6.0

Five-year U.S. government securities7.5

Five-year bank loans9.5

A.What is the amount of the maturity risk premium on one-year versus five-year U.S. government securities?

B.What is the amount of the maturity risk premium on one-year versus five-year bank loans?

C.What is the default risk premium on one-year bank loans and on five-year bank loans?