The Following Premiums Apply to a 7-Month Bond: Interest Rate

question 91

Multiple Choice

The following premiums apply to a 7-month bond: interest rate risk premium = 0.35 percent; liquidity premium = 0.40 percent; default premium = 1.20 percent; inflation premium = 3.15 percent; real rate = 3.00 percent. What is the expected nominal interest rate on a 7-month risky security given these values?

• A) 5.85 percent
• B) 6.45 percent
• C) 7.55 percent
• D) 8.10 percent
• E) 9.30 percent

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Definitions:

Direct Materials

The raw materials that are directly used in the manufacturing process of a product.

Manufacturing Overhead

The indirect factory-related costs incurred when producing a product, including costs associated with maintenance, utilities, and salaries of supervisory personnel.

Direct Labor Costs

Expenses associated with employees who directly contribute to the manufacturing or production of goods in a company.

Annual Overhead Costs

The total expenses not directly tied to a product or service's production, incurred over a year, such as rent, utilities, and insurance.