You’re looking at some corporate bonds issued by Ford, and you are trying to determine what the nominal interest rate should be on them. You have determined that the real risk- free interest rate is 3.0%, and this rate is expected to continue on into the future without any change. In addition, inflation is expected to be constant over the future at a rate of 3.0%. The default- risk premium is also expected to remain constant at a rate of 1.5%, and the liquidity- risk premium is very small for Ford bonds, only about 0.02%. The maturity- risk premium is dependent upon how many years the bond has to maturity. The maturity- risk premiums are as follows:
Given this information, what should the nominal rate of interest on Ford bonds maturing in 0– 1 year, 1– 2 years, 2– 3 years, and 3– 4 years be?

  • CreatedSeptember 11, 2015
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