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 1.70 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real interest rate = 0.80% Default risk premium = 1.60% Liquidity risk premium = 0.90% Maturity risk premium = 2.20% a. What is the inflation premium? (Round your answer to 2 decimal places.) Expected IP % b. What is the fair interest rate on Moore Corporation 30-year bonds? (Round your answer to 2 decimal places.) Fair interest rate %

Explanation / Answer

Moore Corporation Ans) Current Earnings 1.70% Real Interest Rate 0.80% Default Risk Premium 1.60% Liquidity Risk Premium 0.90% Maturity Risk Premium 2.20% Inflation Premium = Current Earnings-Real Interest Rate 0.90% Fair Interest Rate of 30 years bonds of Moore Corporation= Current Earnings+ Default risk premium+Liqudity risk Premium+Maturity Risk Premium 6.40%

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