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Part $1$

On the first day of your summer$$ internship, you've been assigned to work with the Chief Financial Officer$($CFO$)$ of SanBlas Jewels Inc. Not knowing how well trained you$$ are, the CFO has decided to test your understanding of interest rates.$$ Specifically, she asks you to provide a reasonable estimate of the nominal interest rate for a new issue of$$ AAA$-$rated bonds to be offered by SanBlas Jewels Inc. The final format that the chief financial officer of SanBlas Jewels has requested is that of equation$(2-1)$ in the$$ text:

Nominal interest rate equals Start $2$ By $1$ Matrix $1$st Row $1$st Column real risk dash free interest rate plus inflation premium plus default dash risk premium $2$nd Row $1$st Column plus maturity dash risk premium plus liquidity dash risk premium EndMatrixNominal$$interest$$rate$=$

real$$risk$-$free$$interest$$rate$+$inflation$$premium$+$default$-$risk$$premium$+$maturity$-$risk$$premium$+$liquidity$-$risk$$premium

Some$$ agreed$-$upon procedures related to generating estimates for key variables in equation$(2-1)$ follow.

a$.$ The current$3-$month Treasury bill rate is

$2\mathrm{.}862\mathrm{.}86$

$$percent$,$ the$30-$year Treasury bond rate is

$5\mathrm{.}275\mathrm{.}27$

$$percent$,$ the$30-$year AAA$-$rated corporate bond rate is

$6\mathrm{.}536\mathrm{.}53$

$$percent$,$ and the inflation rate is

$2\mathrm{.}162\mathrm{.}16$

percent.

b$.$ The real$$ risk$-$free rate of interest is the difference between the calculated average yield on$3-$month Treasury bills and the inflation rate.

c$.$ The$$ default$-$risk premium is estimated by the difference between the average yields on$$ AAA$-$rated bonds and$30-$year Treasury bonds.

d$.$ The$$ maturity$-$risk premium is estimated by the difference between the average yields on$30-$year Treasury bonds and$3-$month Treasury bills.

e$.$ SanBlas$$ Jewels' bonds will be traded on the New York Bond$$ Exchange, so the$$ liquidity$-$risk premium will be slight. It will be greater than$$ zero, however, because the secondary market for the$$ firm's bonds is more uncertain than that of some other jewelry sellers. It is estimated at

$44$

basis points. A basis point is one$$ one$-$hundredth of $1$ percent.

Now place your output into the format of equation$(2-1)$ so that the nominal interest rate can be estimated and the size of each variable can also be inspected for reasonableness and discussion with the CFO.

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Part $1$

What is the real$$ risk$-$free interest$$ rate?

enter your response here$\%$

$($Round to two decimal$$ places.$)$