Assume the following premiums all apply to a 9-month bond: interest rate risk premium = 0.4%, real return = 2.7%, liquidity premium = 0.5%, default premium = 1.6%, inflation premium = 2.3 %. What is the expected nominal interest rate on a risky security that has nine months to maturity?

Question

Quizplus · Accepted Answer

The expected nominal interest rate on a risky security can be calculated by adding up all the given premiums: real return (2.7%) + inflation premium (2.3%) + interest rate risk premium (0.4%) + liquidity premium (0.5%) + default premium (1.6%) = 7.5%.

Assume the Following Premiums All Apply to a 9-Month Bond