(Answered) Question you are considering an investment in 30-year bonds

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Question: 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 3.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: ( LG 2-6 )

Real interest rate 2.25%

Default risk premium 1.15%

Liquidity risk premium 0.50%

Maturity risk premium 1.75%

a. What is the inflation premium?

b. What is the fair interest rate on Moore Corporation 30-year bonds?

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