Use the Following Information to Calculate the Interest Rate on an Eight-Year

question 57

Multiple Choice

Use the following information to calculate the interest rate on an eight-year bond just issued by Becher Inc.
Inflation: next two years = 2.5%
  year 3 and beyond = 4.5%
Pure Rate = 2.0%
Maturity Risk Premium = zero for a 1-year maturity, increasing by 0.1% each year thereafter
Default Risk Premium = 1.5%
Liquidity Risk Premium = 0.0% for treasuries; 0.5% for corporate bonds

• A)7.7%
• B)8.2%
• C)8.7%
• D)9.2%
• E)9.4%

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Definitions:

Limited Personal Liability

Limited personal liability means that an individual's financial responsibility for business debts or legal claims is restricted, often to the amount they have invested in a company.

Partners

Individuals who share ownership in a business, contributing resources or expertise and sharing profits and losses.

RULPA

The Revised Uniform Limited Partnership Act, which is a standardized set of laws to regulate the formation, operation, and dissolution of limited partnerships in the US.

Duty of Care

A legal obligation imposed on an individual to adhere to a standard of reasonable care while performing acts that could foreseeably harm others.