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Estimate the nominal interest rate on a treasury bond

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Reference no: EM132531513

A thirty year corporate bond has a nominal interest rate of 12 percent. This bond is not liquid and requires a 2 percent liquidity premium (LP). The bond is low quality and, thus, has a default risk premium (DRP) of 2.5 percent. The bond has a remaining life of twenty-five years, resulting in a maturity risk premium (MRP) of 1.5 percent.

a. Estimate the nominal interest rate on a Treasury bond.

b. What would be the inflation premium on the Treasury bond if investors required a real rate of interest of 2.5 percent?

Reference no: EM132531513

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