Assume the Following Premiums All Apply to a 9-Month Bond

question 2

Multiple Choice

Assume the following premiums all apply to a 9-month bond: interest rate risk premium = 0.4%, real return = 2.7%, liquidity premium = 0.5%, default premium = 1.6%, inflation premium = 2.3 %. What is the expected nominal interest rate on a risky security that has nine months to maturity?

• A) 6.0%
• B) 7.5%
• C) 8.5%
• D) 6.4%
• E) 7.0%

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