Stu Wants to Earn a Real Return of 3

question 37

Multiple Choice

Stu wants to earn a real return of 3.4 percent on any bond he acquires.The inflation rate is 2.8 percent.He has determined that a particular bond he is considering should have an interest rate risk premium of .27 percent,a liquidity premium of .08 percent,and a taxability premium of 1.69 percent.What nominal rate of return is Stu demanding from this particular bond?

• A)8.34 percent
• B)7.19 percent
• C)8.40 percent
• D)7.38 percent
• E)8.74 percent

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Definitions:

Capital Account

A financial statement that shows the changes in ownership interest in a company over a period.

Salary Allowance

A fixed amount of money paid to employees, often as part of compensation for job-related expenses or allowances.

Interest Allowance

A provision or adjustment made for the calculation of interest receivable or payable over a specified period.

Fixed Ratio

A prescribed relationship between two quantities, expressed as a constant value.