MC Qu. 1 Determinants of Interest Rate for Individual Securities A partic... Det
ID: 2781435 • Letter: M
Question
MC Qu. 1 Determinants of Interest Rate for Individual Securities A partic... Determinants of Interest Rate for Individual Securities A particular security's default risk premium is 470 percent For all securities, the infiation risk premium is 3.70 percent and the real interest rate is 3.10 percent. The security's liquidity risk premium Is 160 percent and maturity risk premium is 2.60 percent The security has no special covenants. What is the security's equilibrium rate of return? o 630% 1570% 31.40% 314%Explanation / Answer
Equilibrium rate of return=Default risk premium+Inflation risk premium+real interest rate+Liquidity risk premium+Maturity risk premium
=(4.7+3.7+3.1+1.6+2.6)
=15.70%
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