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27 April, 13:58

You are considering an investment in 30-year bonds issued by Moore Corporation The bonds have no special covenants. The Wall Street ournal reports that one-year T-bills are currently earning 3.55 percent Your broker has determined the following information about economic activity and Moore Corporation bonds 50Real interest rate 2.75 percent Default risk premium-1.05 percent Liquidity risk premium 0.50 percent Maturity risk premium 1.85 percent What is the inflation premium?

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  1. 27 April, 16:00
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    0.8%

    Explanation:

    Moore Corporation

    T-bills are currently earning 3.55 %

    Less Real interest rate 2.75%

    Inflation premium 0.8%

    Or

    Expected IP = i - RFR = 3.55% - 2.75% = 0.8%

    Therefore the inflation premium is 0.8%
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