You Are Considering an Investment in 30-Year Bonds Issued by a Corporation.The

question 74

Multiple Choice

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 one-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 percent
Default risk premium = 1.75 percent
Liquidity risk premium = 0.70 percent
Maturity risk premium = 1.50 percent
What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?

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

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