Check m 15 You are considering an investment in 20-year bonds issued by Moore Co

Question

Check m 15 You are considering an investment in 20-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wa Street Journal reports that 1-year T-bills are currently earning 0.50 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: points -0.41% - 1.05 Real riak-free rate Default risk premiun Liquidity risk premium - 0.90 Maturity risk premium -0.75% eBook a. What is the inflation premium? b. What is the fair interest rate on Moore Corporation 30-year bonds? References (For all requirements, round your answers to 2 decimal places. (e.g., 32.16) a. Inflation premiunm b. Fair interest rate

Explanation / Answer

Answer a.

Expected Inflation Premium = 1-year T-Bill Return - Real Risk-free Rate
Expected Inflation Premium = 0.50% - 0.41%
Expected Inflation Premium = 0.09%

Answer b.

Fair Interest Rate = 1-year T-Bill Return + Default Risk Premium + Liquidity Risk Premium + Market Risk Premium
Fair Interest Rate = 0.50% + 1.05% + 0.90% + 0.75%
Fair Interest Rate = 3.20%

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