Question

1. A particular security's equilibrium rate of return is 8 percent.5. Tom and Sue's Flowers, Inc.'s 15-year bonds are currently yielding a return of 8.25 percent. The expected inflation pre- mium is 2.25 percent annually and the real risk-free rate is expected to be 3.50 percent annually over the next 15 years. The default risk premium on Tom and Sue's Flowers's bonds is 0.80 percent. The maturity risk premium is 0.75 percent on five-year securities and increases by 0.04 percent for each additional year to maturity. Calculate the liquid- ity risk premium on Tom and Sue's Flowers, Inc.'s 15-year For all securities, the inflation risk premium is 1.75 per- cent and the real risk-free rate is 3.5 percent. The security's liquidity risk premium is 0.25 percent and maturity risk pre- mium is 0.85 percent. The security has no special covenants Calculate the security's default risk premium. (LG 2-6) 2. You are considering an investment in 30-year bonds issued by Moore Corporation. enants. The Wall Street Journal reports that one-year T-bills are currently earning 3.25 percent. Your broker has deter- mined the following information about economic activity and Moore Corporation bonds: (LG 2-6) 6. Nikki G's Corporation's 10-year bonds are currently yield- ing a return of 6.05 percent. The expected inflation pre- mium is 1.00 percent annually and the real risk-free rate is expected to be 2.10 percent annually over the next 10 years. The liquidity risk premium on Nikki G's bonds is 0.25 per- cent. The maturity risk premium is 0.10 percent on 2-year securities and increases by 0.05 percent for each additional year to maturity. Calculate the default risk premium on Real risk-free rate 2 Default risk premium -1.15% Liquidity risk premium 0.50% Maturity risk premium-1.75% a. What is the inflation premium? b. What is the fair interest rate on Moore Corporation Nikki G's 10-year bonds. (LG 2-6)

Answer 1