A Particular Security's Default Risk Premium Is 3 Percent

question 66

Multiple Choice

A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is 2 percent and the real interest rate is 2.25 percent. The security's liquidity risk premium is 0.75 percent and maturity risk premium is 0.90 percent. The security has no special covenants. What is the security's equilibrium rate of return?

• A) 1.78 percent
• B) 3.95 percent
• C) 8.90 percent
• D) 17.8 percent

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Definitions:

Currency

A system of money in general use in a particular country.

Undervaluing Currency

A policy or practice where a country deliberately keeps its currency's value lower than its real strength to gain a competitive advantage in international trade.

China

A country in East Asia, known for its long history, diverse culture, and significant influence on global politics and economy.

Currency Exchange Rate

The value of one currency for the purpose of conversion to another, dictating how much one currency is worth in terms of another.