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 5.20 percent. Your broker has determined the following information about economic activity and the corporation bonds: Real interest rate = 4.85% Default risk premium = 3.95% Liquidity risk premium = 1.10% Maturity risk premium = 3.70% What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?
A) .35% and 13.95%, respectively
B) 5.20% and 18.80%, respectively
C) .35% and 2.79%, respectively
D) .35% and 13.60%, respectively
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