The real rate of interest is 2.5%. Inflation is expected to be 3.5% in the upcoming year, 3% next year, and then 2% per year after year 2. The maturity risk premium is 0.2%(t - 1), where t is the years until maturity, The liquidity risk premium is 0.8% regardless of the time to maturity, and the default risk premium is 1.2% regardless of the time to maturity.

A) What is the nominal rate for a 4-year Treasury bond? B) What is the nominal rate for a 4-year corporate bond?

B) What is the nominal rate for a 4-year corporate bond?

Answer rating: 100% (QA)

To calculate the nominal rate for a 4year Treasury bond we need to consider the real rate of interes... View the full answer