A particular security’s default risk premium is 4 percent. For all securities, t

Question

A particular security’s default risk premium is 4 percent. For all securities, the inflation risk premium is 3.65 percent and the real risk-free rate is 7.30 percent. The security’s liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. The security has no special covenants. Calculate the security’s equilibrium rate of return. (Round your answer to 2 decimal places.)

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A particular security’s default risk premium is 4 percent. For all securities, the inflation risk premium is 3.65 percent and the real risk-free rate is 7.30 percent. The security’s liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. The security has no special covenants. Calculate the security’s equilibrium rate of return. (Round your answer to 2 decimal places.)

Explanation / Answer

Rate of Return = Real Risk-free Rate + Default Risk Premium + Inflation Risk Premium + Liquidity Risk Premium + Maturity Risk Premium
Rate of Return = 7.30% + 4.00% + 3.65% + 0.35% + 0.95%
Rate of Return = 16.25%

So, equilibrium rate of return for the security is 16.25%

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