You Are Considering an Investment in 30-Year Bonds Issued by a Corporation

question 54

Multiple Choice

You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that one-year T-bills are currently earning 3.50 percent. Your broker has determined the following information about economic activity and the corporation's bonds:
Real interest rate = 2.50 percent
Default risk premium = 1.75 percent
Liquidity risk premium = 0.70 percent
Maturity risk premium = 1.50 percent
What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?

• A) 1 percent and 1.49 percent, respectively
• B) 1 percent and 6.45 percent, respectively
• C) 1 percent and 7.45 percent, respectively
• D) 3.50 percent and 9.95 percent, respectively

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Definitions:

Glucagon-like Peptide-1

A hormone that aids in regulating glucose levels in the blood by increasing insulin production.

Hypothalamus

A region of the brain responsible for producing hormones that control various bodily functions, including temperature regulation, hunger, moods, and the release of hormones from the pituitary gland.

Appetite

The innate craving to fulfill a physical necessity, particularly the need for nourishment.

Binge Eating Disorder

A serious eating disorder marked by recurrent episodes of eating large quantities of food (often very quickly and to the point of discomfort), a feeling of a loss of control during the binge, experiencing shame, distress or guilt afterwards, and not regularly using unhealthy compensatory measures (e.g., purging) to counter the binge eating.