A particular security’s equilibrium rate of return is 8 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 3.5 percent. The security’s liquidity risk premium is .25 percent and maturity risk premium is .85 percent. The security has no special covenants. Calculate the security’s default risk premium.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 one-year T-bills are currently earning 3.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real interest rate " 2.25%Default risk premium " 1.15%Liquidity risk premium " 0.50%Maturity risk premium " 1.75%What is the inflation premium?What is the fair interest rate on Moore Corporation 30-year bonds?

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Answered: Calculate the security’s default risk…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 5MC: What would be the value of the bond described in Part d if, just after it had been issued, the...

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A particular security’s equilibrium rate of return is 8 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 3.5 percent. The security’s liquidity risk premium is .25 percent and maturity risk premium is .85 percent. The security has no special covenants. Calculate the security’s default risk premium.
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 one-year T-bills are currently earning 3.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:

Real interest rate " 2.25%

Default risk premium " 1.15%

Liquidity risk premium " 0.50%

Maturity risk premium " 1.75%

What is the inflation premium?
What is the fair interest rate on Moore Corporation 30-year bonds?

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