Interest Rates You Are Considering an Investment in 30-Year Bonds

question 2

Multiple Choice

Interest rates 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 1-year T-bills are currently earning 3.50 percent. Your broker has determined the following information about economic activity and the corporation bonds: Real interest rate = 2.50%
Default risk premium = 1.75%
Liquidity risk premium = 0.70%
Maturity risk premium = 1.50%
What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?

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