Stu wants to earn a real return of 3.4 percent on any bond he acquires.The inflation rate is 2.8 percent.He has determined that a particular bond he is considering should have an interest rate risk premium of .27 percent,a liquidity premium of .08 percent,and a taxability premium of 1.69 percent.What nominal rate of return is Stu demanding from this particular bond?
A)8.34 percent
B)7.19 percent
C)8.40 percent
D)7.38 percent
E)8.74 percent

Question

Quizplus · Accepted Answer

The nominal rate of return is the sum of the real rate of return, the inflation rate, the interest rate risk premium, the liquidity premium, and the taxability premium. Therefore, the nominal rate of return is 3.4% + 2.8% + 0.27% + 0.08% + 1.69% = 8.24%.

Stu Wants to Earn a Real Return of 3