A Particular Security's Default Risk Premium Is 3 Percent

question 56

Multiple Choice

A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 4.2 percent. The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. The security has no special covenants. Calculate the security's equilibrium rate of return.

• A) 8.50 percent
• B) 6.05 percent
• C) 10.25 percent
• D) 9.90 percent

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Definitions:

Sherman Act

A landmark antitrust law passed in 1890 in the United States, designed to promote market competition by prohibiting monopolies, cartels, and other forms of anticompetitive conduct.

Criminally Convicted

Being criminally convicted means that an individual has been found guilty of a crime by a court of law, following a formal trial or plea agreement.

Violating

The action of violating or not adhering to a regulation, pact, or statute.

Rule Of Reason

A legal principle in antitrust law that evaluates the legality of business practices based on their overall impact on competition, rather than deeming them inherently unlawful.