Tom and Sue's Flowers, Inc.'s 20-year bonds are currently yielding a return of 8.80 percent. The expected inflation premium is 2.80 percent annually and the real risk-free rate is expected to be 3.50 percent annually over the next 20 years. The default risk premium on Tom and Sue's Flowers' bonds is 0.80 percent. The maturity risk premium is 0.75 percent on 10-year securities and increases by 0.03 percent for each additional year to maturity. Calculate the liquidity risk premium on Tom and Sue's Flowers, lnc.'s 20-year bonds. (Round your answer to 2 decimal places.)
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 1-year T-bills are currently earning 2.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:
Real risk-free rate = 0.85%
Default risk premium = 2.15%
Liquidity risk premium = 1.40%
Maturity risk premium = 2.75%
- What is the inflation premium? (Round your answer to 2 decimal places.)
- What is the fair interest rate on Moore Corporation 30-year bonds? (Round your answer to 2 decimal places.)