Question

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 0.30 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: What is the inflation premium? (Round your answer to 2 decimal places, (e.g., 32.16)) What is the fair interest rate on Moore Corporation 30-year bonds? (Round your answer to 2 decimal places, (e.g., 32.16))

Answer 1

Answer:

0.05% and 2.70%

Explanation:

The computation is shown below:

Inflation Premium = Nominal Risk-free Rate - Real risk-free rate

                              = 0.30% - 0.25%

                              = 0.05%

Fair Interest Rate = Nominal Risk-Free Rate + Default Risk Premium + Maturity Risk Premium + Liquidity Risk Premium

= 0.30% + 1.05% + 0.70% + 0.65%

= 2.70%

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