Question: You are considering an investment in 30 year bonds issued by

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 3.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:
Real risk-free rate = 2.25%
Default risk premium = 1.15%
Liquidity risk premium = 0.50%
Maturity risk premium = 1.75%
a. What is the inflation premium?
b. What is the fair interest rate on Moore Corporation 30-year bonds?

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  • CreatedJanuary 27, 2015
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