You are considering an investment in 30-year bonds issued by Moore Corporation.

Question

You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 2.05 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:   

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

  Real interest rate = 0.65%   Default risk premium = 1.95%   Liquidity risk premium = 1.40%   Maturity risk premium = 2.55%

Explanation / Answer

a.Expected Inflation premium=T-bill rate- Real interest rate=2.05%-0.65%=1.4%

b.Fair interest rate=1.4%+0.65%+1.95%+1.40%+2.55%=7.95%

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