You read in the Wall Street Journal that 30-day T-bills are currently yielding 5.55. your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:
Maturity risk premium=1.8%
Default risk premium=2.15%
On the basis of these data, what is the real risk-free rate of return?
The determinants of interest rates are:
k = k* + IP + LP + MRP + DRP
k = required return on a debt ...
This solution calculates the real risk-free rate of return is with the given inflation premium, liquidity premium, maturity risk premium and default risk premium.