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Calculate the security default risk premium

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Q1. 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 risk-free rate is 3.5 percent. The security's liquidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent. The security has no special covenants. Calculate the security's default risk premium.

Q2. 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 page 55 are currently earning 3.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:

Real risk-free rate = 2.25%

Default risk premium = 1.15%

Liquidity risk premium = 0.50%

Maturity risk premium = 1.75%

a. What is the inflation premium?

b. What is the fair interest rate on Moore Corporation 30-year bonds?

Reference no: EM132747106

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