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Determinants of Interest Rate for Individual Securities A particular security's default risk premium is 4.30 percent. Fo...

Determinants of Interest Rate for Individual Securities A particular security's default risk premium is 4.30 percent. For all securities, the inflation risk premium is 3.30 percent and the real interest rate is 2.90 percent. The security's liquidity risk premium is 1.40 percent and maturity risk premium is 2.20 percent. The security has no special covenants. What is the security's equilibrium rate of return?

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Answer #1

Nominal Yield on Bond = Real risk free rate + Inflation premium + Liquidity premium + Maturity risk premium + Default risk premium

Nominal yield on bond = 2.90% + 3.30% + 1.40% + 2.20% + 4.30%

Nominal yield on bond = 14.10%

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