Assume that the market thinks the real rate is 2.00%, the inflation premium is 2.70%, the bond's default risk justifies a premium of 2.10%, the maturity premium is 0.50%, and the liquidity premium is 1.10%. Since the cash flows are denominated in euros, the foreign-exchange rate premium is 1.50%. What is the discount rate?

Question

Quizplus · Accepted Answer

The discount rate is the sum of all the premiums: 2.00% (real rate) + 2.70% (inflation premium) + 2.10% (default risk premium) + 0.50% (maturity premium) + 1.10% (liquidity premium) + 1.50% (foreign-exchange rate premium) = 9.90%.

Assume That the Market Thinks the Real Rate Is 2