A particular security’s equilibrium rate of return is 8 percent. For all securit
ID: 2808669 • Letter: A
Question
A particular security’s equilibrium rate of return is 8 percent. For all securities, the inflation risk premium is 1.25 percent and the real risk-free rate is 3.5 percent. The security’s liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. The security has no special covenants. Calculate the security’s default risk premium. Round your answer to 2 decimal places. (e.g., 32.16)
A particular security’s equilibrium rate of return is 8 percent. For all securities, the inflation risk premium is 1.25 percent and the real risk-free rate is 3.5 percent. The security’s liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. The security has no special covenants. Calculate the security’s default risk premium. Round your answer to 2 decimal places. (e.g., 32.16)
Explanation / Answer
The interest rate of security = risk free rate+Inflation premium+liquidity premium+Maturity risk premium+Default risk premium
Hence 8%=3.5+1.25+0.35+0.95+Default risk premium
Default risk premium = 1.95%
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