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 fair interest rate on Moore Corporation 30-year bonds?

Question

Quizplus · Accepted Answer

The fair interest rate is calculated by summing the real interest rate, default risk premium, liquidity risk premium, and maturity risk premium: 2.75% + 1.05% + 0.50% + 1.85% = 6.15%. However, the one-year T-bill rate (3.55%) is not directly added to this calculation. The correct answer should be 6.95% when considering the total risk premiums and real interest rate.

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