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The following premiums apply to a 6 month bond: interest rate risk premium = 0.22 percent;...

The following premiums apply to a 6 month bond: interest rate risk premium = 0.22 percent; real rate = 3.50 percent; default premium = 0.12 percent; inflation premium = 1.45 percent. What is the expected difference in nominal interest rates between a 6-month risky security and a 6 month, default free security?

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Answer #1

I have answered the question below using excel and have attached the image below.

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Answer:

The yield on a bond could be calculated as follows: Bond yield = real risk free rate + inflation premium + interest rate risk

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