Assume the following premiums all apply to a 6-month bond: interest rate risk premium = 0.3%, real return = 2.6%, liquidity premium = 0.6%, default premium = 1.4%, inflation premium = 1.1 %. What is the expected nominal interest rate on a default-free security that has six months to maturity?
A) 4.0%
B) 4.3%
C) 4.6%
D) 5.4%
E) 6.0%
Correct Answer:
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