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Apple Inc. 15-year bonds are currently yielding a return of 8.25 percent. The expected inflation premium...

Apple Inc. 15-year bonds are currently yielding a return of 8.25 percent. The expected inflation premium is 2.25 percent annually and the real risk-free rate is expected to be 3.50 percent annually over the next 15 years. The default risk premium on Apple's bonds is 0.80 percent. The maturity risk premium is 0.75 percent on five-year securities and increases by 0.04 percent for each additional year to maturity. Calculate the liquidity risk premium on Apple Inc. 15-year bonds.

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Answer #1

Answer is = 0.55%

r = r* + Inflation Premium + Default Risk Premium + Liquidity Premium + Maturity Risk Premium

r =Required Return on a debt security=8.25%

r*=real risk-free rate of interest = 3.50%

IP=inflation premium=2.25%

DRP=default risk premium= 0.80

LP=liquidity premium ?

MRP=maturity risk premium = (0.75% + (0.04% x 10))

8.25% = 2.25% + 3.50% + 0.80 + LRP + (0.75% + (0.04% x 10))

LRP = 8.25% - (2.25% + 3.50% + 0.80% + (0.75% + (0.04% x 10))) = 0.55%

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