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Use the following information to calculate the interest rate on a 7-year bond just issued by Becher Inc.
Inflation: first three years = 2.5%, year 4 and beyond = 4.5% (so you need to determine INFL for this bond from chapter 5)
Pure Rate = 2.0%
Maturity Risk Premium = zero for a 1-year maturity, increasing by .1% each year thereafter (for example, draw a timeline, the end of first year (point 1) the premium is zero, the end of the second year (point 2), the premium is 0.1, and so on).
Default Risk Premium = 1.5%
Liquidity Risk Premium = 1.0% for treasuries; 0.5% for Corporate bonds
Hint: K = Pure Rate + Inflation + MR + LR + DR Pure Rate + Inflation = Nominal risk-free rate = T-bill rate
a. 5.343%
b. 6.343%
c. 7.343%
d. 8.343%
how much money will you need to have saved up in your 401k plan at the begining of your retirement so that you can
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