Problem 6-3 Determinants of Interest Rates for Individual Securities (LG6-6) Dak

Question

Problem 6-3 Determinants of Interest Rates for Individual Securities (LG6-6) Dakota Corporation 15-year bonds have an equilibrium rate of return of 7 percent. For all securities, the inflation risk premium is 1.30 percent and the real risk-free rate is 2.40 percent. The security's liquidity risk premium is 0.40 percent and maturity risk premium is 1.00 percent. The security has no special covenants. Calculate the bond's default risk premium. (Round your answer to 2 decimal places.) It risk 12 of 40

Explanation / Answer

Equilibrium Rate of Return =inflation Risk + Real Interest + Default risk Premium + Liqudity risk +Maturity risk Premium 7%=1.30%+2.40%+DRP+.40%+1% DRP =1.90%

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