You are considering an investment in 30-year bonds issued by Moore Corporation
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You are considering an investment in 30-year bonds issued by Moore Corporation

Question (2): Answer the following question:

You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.25%. Your broker has determined the following information about economic activity and Moore Corporation bonds: 

Real risk-free rate         = 2.25%

Default risk premium   =1.15%

Liquidity risk premium = 0.50%

Maturity risk premium = 1.75%

a) What is the inflation premium?

b) What is the fair interest rate on Moore Corporation 30-years bonds?

Hint
Accounts and Finance" Inflation premium is part of the required return which represents compensation for inflation risk. The following formula is used when estimating inflation premium:Inflation Premium = YieldTB - YieldIPWhereYieldTB - yield on a Treasury bond YieldIP - yield on Treasury inflation-protected security If you have the nominal and real rates the following formula is ap...
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