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 3.80 percent. Your broker has determined the following information about economic activity and the corporation bonds:
Real interest rate = 3.15%
Default risk premium = 3.05%
Liquidity risk premium = 1.35%
Maturity risk premium = 2.80%
What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?
A) .65% and 11.00%, respectively
B) .65% and 2.20%, respectively
C) .65% and 10.35%, respectively
D) 3.80% and 14.15%, respectively