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Help ctmh oblems Help Save& Exit Subm Check my work You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.30 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real risk-free rate: 0.70% Liquidity risk premium a: O.60% Maturity risk premium-1.80% a. What is the inflation premium? (Round your answer to 2 decimal places.) IP b. What is the foir interest rate on Moore Corporation 30-year bonds? (Round your answer to 2 decimal places)
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Answer #1

a. The inflation premium is calculated by deducting the real risk free rate from the earning rate of T-Bills therefore,

Inflation Premium = T-Bills Earning Rate- Real Risk Free Rate

Inflation Premium = 1.30%-0.70%

Inflation Premium/ Expected IP  = 0.60%

b) The fair interest rate (r) on Moore Corporation 30 year bonds has been calculated as follows-

  r = Real risk-free interest rate + Inflation premium + Default risk premium + Liquidity premium + Maturity premium

r = 0.70%+0.60%+1.20%+0.60%+1.80%

r = 4.90%

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