Suppose that the current market interest rate is 12% for non-fraudulent bonds,and that one in six bonds are fraudulent in a given market.What would the interest rate be if a fraud premium is introduced,assuming (1)a one-year investment horizon and (2)the market does not require a risk premium?

Question

Quizplus · Accepted Answer

5 * (1 + k)= 6 * ($1.12)F1S1S1W1F1F1F10 5 * (1 + k)= 6.72 F1S1S1W1F1F1F10 k = 34.4%

Suppose That the Current Market Interest Rate Is 12% for Non-Fraudulent