You are considering an investment in 20-year bonds issued by Moore Corporation.

Question

You are considering an investment in 20-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 .50 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:

What is the inflation premium? (Round your answer to 2 decimal places. (e.g., 32.16))

What is the fair interest rate on Moore Corporation 30-year bonds? (Round your answer to 2 decimal places. (e.g., 32.16))

You are considering an investment in 20-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 .50 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:

Explanation / Answer

Answer:a Calculation of inflation premium:

Expected IP = i - RIR = 0.50% - 0.47% = 0.03%

Answer:b. Fair interest rate = 0.03% + 0.47% + 1.05% + 0.60% + 0.85% = 3%

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