3. Answer the following questions: A particular security\'s equilibrium rate of
ID: 2811124 • Letter: 3
Question
3. Answer the following questions: A particular security's equilibrium rate of return is 8 percent. For all securities, the inflation risk premium is 1.75 percent and the real risk-free rate is 3.5 percent. The security's liq- uidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent. Calculate the security's default risk premium? B You are considering an investment in 30-year bonds issued by Moore Corporation. The Wall Street Journal reports that one-year T-bills are currently earning 3.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:Explanation / Answer
A)
Security’s default risk premium:
= Equilibrium rate of return – Real risk-free rate – Inflation risk premium – Liquidity premium – Maturity risk premium
= 8%-3.5%-1.75%-0.25%-0.85%
= 1.65%
Hence, Security’s default risk premium is 1.65%
Related Questions
Hire Me For All Your Tutoring Needs
Integrity-first tutoring: clear explanations, guidance, and feedback.
Drop an Email at
drjack9650@gmail.com
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.