4. An investor buys a 20-year Bbb-rated corporate bond with a nominal annual rat

Question

4. An investor buys a 20-year Bbb-rated corporate bond with a nominal annual rate of return of 10%. The average inflation rate is expected to be 2%. The default risk premium is expected to be 5% and the maturity premium is 4%. Calculate the real rate of interest.

5. Jeremy has developed a new invention that will enable a large airplane to lift vertically off the ground to begin flight, thus not needing a runway (similar to a helicopter). He would like to showcase this idea to the US government, but estimates he needs millions of dollars to build the first prototype. He maxed out his credit cards and his friends and family already provided him with the seed capital to do the research to support his idea. What type of investor may be interested in helping him? What does this investor normally want in return?

Explanation / Answer

4) Real interest rate = (1 + Nominal interest rate) / (1+ inflation rate) = 1.10/1.02 = 7.8%

5) An angel investor or a venture capitalist would help Jeremy in his new invention

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