(Interest rate determination?) ? You\'re looking at some corporate bonds issued
ID: 1170151 • Letter: #
Question
(Interest rate determination?) ? 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 3.7 %?, 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 3.4 %. The? default-risk premium is also expected to remain constant at a rate of 2.1 %?, and the? liquidity-risk premium is very small for Ford? bonds, only about 0.03 %. The? maturity-risk premium is dependent upon how many years the bond has to maturity. The? maturity-risk premiums are shown in the popup? window: LOADING.... 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? The nominal rate of interest on Ford bonds maturing in? 0-1 year should be nothing?%. ?(Round to two decimal? places.) The nominal rate of interest on Ford bonds maturing in? 1-2 years should be nothing?%. ?(Round to two decimal? places.) The nominal rate of interest on Ford bonds maturing in? 2-3 years should be nothing?%. ?(Round to two decimal? places.) The nominal rate of interest on Ford bonds maturing in? 3-4 years should be nothing?%. ?(Round to two decimal? places.)
BOND MATURES? IN:
?MATURITY-RISK PREMIUM:
?0-1 year
0.050.05?%
? 1-2 years
0.400.40?%
? 2-3 years
0.650.65?%
? 3-4 years
0.900.90?%
Click on the icon located on the? top-right corner of the data table in order to copy its contents into a spreadsheet.
BOND MATURES? IN:
?MATURITY-RISK PREMIUM:
?0-1 year
0.050.05?%
? 1-2 years
0.400.40?%
? 2-3 years
0.650.65?%
? 3-4 years
0.900.90?%
Click on the icon located on the? top-right corner of the data table in order to copy its contents into a spreadsheet.
Explanation / Answer
BOND MATURES? IN: ?MATURITY-RISK PREMIUM: Risk Free Rate Inflation Default Premium Rate Liquidity Risk Premium Nominal Rate of Interest ?0-1 year 0.05% 3.70% 3.40% 2.10% 0.03% 9.28% ? 1-2 years 0.40% 3.70% 3.40% 2.10% 0.03% 9.63% ? 2-3 years 0.65% 3.70% 3.40% 2.10% 0.03% 9.88% ? 3-4 years 0.90% 3.70% 3.40% 2.10% 0.03% 10.13%
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