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Interest Rates on Bonds

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You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.50 percent. Your broker has determined the following information about economic activity and the corporation bonds:

1 Year T-bill Rate 3.50%
Real Interest Rate 2.50%
Default Risk Premium 1.75%
Liquidity Risk Premium 0.70%
Maturity Risk Premium 1.50%

Inflation Premium ___________
1 Year Corporate Bond Rate__________
30 Year T-bond Rate___________
30 Year Corporate Bond Rate________

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The solution includes step by step explanations to calculate bond rates.

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Solution:

Inflation Premium 1%
1 Year Corporate Bond Rate 3.5%
30 Year T-bond Rate 3.525%
30 Year Corporate ...

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Manal Elkhoshkhany, MBA
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  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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