You are considering an investment in 30 year bonds issued by Moore corporation.

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 1.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real risk-free rate=7.5%; Default risk premium= 1.15%; Liquidity risk premium=1.75%; Maturity risk premium=1.75%. A. What is the inflation premium? B. What is the fair interest rate on Moore corporation 30 year bonds?

Explanation / Answer

T-bill rate = 1.25%

Real risk free rate = 7.5%

Expected Inflation Premium = 1.25% - 7.5%

Expected Inflation Premium = -6.25%

Part B:

Fair Interest Rate = 7.5% + 1.15% + 1.75% + 1.75% - 6.25%

Fair Interest Rate = 5.90%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.