Homework Answers
1.
Comparing Investments of same maturity-Investment 1 and 2, we see
they differ only in liquidity and have same default risk. So the
difference in yield must be because of liquidity risk premium.
Liquidity risk premium=3.81%-3%=0.81%
2.
Comparing Investments of same maturity-Investment 4 and 5, we see
they differ in liquidity and default risk. So the difference in
yield must be because of default risk premium+liquidity risk
premium.
Default risk premium=6.75%-5.25%-0.81%=0.69%
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Expert home / study / business/finance / finance questions and answers / a the real risk-free rate of interest, r*, is 3%, and it i And Question: A. The real risk-free rate of interest, r*, is 3%; and i A. The real risk-free rate of interest, r*. is 3%; and it is expected to remain constant over time. Inflation is expected to be 3% per year for the next 3 years and 4% per year for the next 5 years....
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