Question
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
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 4.25 percent. Your broker has determined the following information about economic activity and the corporation bonds:
The 30-year bond's equilibrium rate of return = 8.15%
Real interest rate = 3.25%
Liquidity risk premium = 0.40%
Maturity risk premium = 1.25%
What is the inflation premium (0.5 point)? What is the default risk premium (DRP) on the corporation's 30-year bonds (1 point)?
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International Finance Theory and Policy
Authors: Paul R. Krugman, Maurice Obstfeld, Marc J. Melitz
10th edition
978-0133425895, 133425894, 978-0133423631, 133423638, 978-0133423648
