Determinants of Interest Rate for Individual Securities 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 1-year T-bills are currently earning 5.30 percent. Your broker has determined the following information about economic activity and the corporation bonds:
Real interest rate = 4.15%
Default risk premium = 2.55%
Liquidity risk premium = .40%
Maturity risk premium = 2.30%
What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?
5.30% and 14.70%, respectively
1.15% and 2.11%, respectively
1.15% and 9.40%, respectively
1.15% and 10.55%, respectively