The risk-free interest rate is 4.1% per year, the liquidity premium is 0.5% per year, the maturity premium is 0.7% per year, the inflation premium is 2.2% per year, and the default premium is 2.7% per year. What is the annual real interest rate? 1) 1.9% O2) 1.5% 3) 2.3% 4) 2.1% 5) 1.7%

The risk-free interest rate is 4.1% per year, the liquidity premium is 0.5% per year, the maturity premium is 0.7% per year, the inflation premium is 2.2% per year, and the default premium is 2.7% per year. What is the annual real interest rate? 1) 1.9% O2) 1.5% 3) 2.3% 4) 2.1% 5) 1.7%

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 18P

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

The risk-free interest rate is 4.1% per year, the liquidity premium is 0.5% per year, the maturity
premium is 0.7% per year, the inflation premium is 2.2% per year, and the default premium is
2.7% per year. What is the annual real interest rate?
1) 1.9%
2) 1.5%
3) 2.3%
4) 2.1%
5) 1.7%

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