Question
In: Finance
A corporate bond has a nominal interest rate of 13%. The bond isn’t very liquid, and...
A corporate bond has a nominal interest rate of 13%. The bond
isn’t very liquid, and thus has a 2%
liquidity premium. The bond is rated B, and therefore has a
default risk premium of 2.5%. The bond is
also due in 20 years, which results in a maturity risk premium
of 1.5%.. Open to all
(a) compute the nominal interest rate on a long-term Treasury
bond _________
(b) what is the real rate of return on the Treasury bond if
the market rate included a 2.5% inflation premium? __________
Solutions
Expert Solution
| a] | Nominal interest rate on a long term treasury bond = 13%-2%-2.5%1.5% = | 7.00% |
| b] | Real rate of return on the treasury bond = 7.00%-2.5% = | 4.50% |
jeff jeffy answered 2 years agoRelated Solutions
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