Suppose the real interest rate on a risk-free

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Suppose the real interest rate on a risk-free (T-bill) is 4% and the expected inflation rate is 1.5 %. There are two bonds (A and B). The nominal interest rate on bond A is 7% and the nominal interest on bond B is 10%. Bond A matures in 10 years and bond B matures in 15 years. Neither bond has a liquidity premium. a) Compute the nominal interest rate on the risk-free bond (T-Bill). b) Compute the risk premium of each bond. c) Compute the maturity risk premium of each bond if the default risk premium (DRP) on bond A is 1.5% while the default risk premium (DRP) on bond B is 2%.

Reference no: EM131107473

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