Task: Compute the nominal rate of interest on a 25 year BBB bond issue for a company given the following sets of circumstances:
1. The default risk premium is estimated to be the difference between the average yield on BBB rated bonds (12.75%) and 25 year treasury bonds (5.15%).
2. Due to the questionable economic outlook of similar companies, the liquidity risk premium is estimated to be 3.1%
3. The risk free rate of interest is the difference between the calculated average yield on 3 month treasury bills (3.55%) the inflation rate (3.2%)
4. The maturity premium is estimated to be the difference between the average yield on 25 year treasury bonds (5.15%) and 3 month treasury bills (3.55%).
5. The inflation risk premium is the rate of inflation expected to occur over the life of the bonds.
Please show all work.