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You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no...

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 1.50 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:

    

  Real risk-free rate = 0.50%
  Default risk premium = 1.40%
  Liquidity risk premium = 1.00%
  Maturity risk premium = 2.00%

   

a. What is the inflation premium? (Round your answer to 2 decimal places.)

  

  Expected IP %

  

b.

What is the fair interest rate on Moore Corporation 30-year bonds? (Round your answer to 2 decimal places.)

  

  Fair interest rate %  
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Answer #1
Real risk free interest rate 1.50%
real interest rate 0.50%
Default risk premium 1.40%
Liquidity risk premium 1%
Maturity risk premium 2%
1 Risk free rate = real rate+inflation rate
Inflation rate = risk free rate - real rate
1.50%-0.5%
Inflation premium or rate 1.00%
2 fair interest rate
real rate + inflation premium+default risk premium+maturity risk premium+liquidity premium
(0.5%+1%+1.4%+2%+1%)
fair interest rate 5.90%
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