Question

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?

Answer 1

Answer:

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%