Homework Answers
1. Real Risk-free Interest rates = Average yield of 3-months
treasury bills - inflation rate
= 2.79% - 2.01% = 0.78%
2. Inflation Premium = Average yield of 3-months treasury bills
- Real risk-free Interest rate
= 2.79% - 0.78% = 2.01%
3. Default Risk Premium = Average yield on Aaa-rated bond -
Average yield on 30 years treasury bonds
= 6.64% - 5.45% = 1.19%
4. Maturity Risk premium = Average yield on 30 years treasury
bonds - Average yield of 3-months treasury bills
= 5.45% - 2.79% = 2.66%
5. Liquidity Risk Premium = 7 basis points = 0.07%
6. Nominal Interest Rate = Real Risk-free Interest rate +
inflation premium + default risk premium + maturity risk premium +
liquidity risk premium
= 0.78% +2.01% + 1.19% + 2.66% + 0.07% = 6.71%
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