You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that one-year T-bills are currently earning 3.55 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:
Real interest rate = 2.75 percent
Default risk premium = 1.05 percent
Liquidity risk premium = 0.50 percent
Maturity risk premium = 1.85 percent
What is the inflation premium?

Question

Quizplus · Accepted Answer

The nominal interest rate on T-bills is 3.55%. The real interest rate is 2.75%. The inflation premium is the difference between the nominal rate and the real rate: 3.55% - 2.75% = 0.80%.

You Are Considering an Investment in 30-Year Bonds Issued by Moore