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Write a general expression for the yield on any debt security (rd) and define these terms: real risk-free rate of interest (r*), inflation premium (IP), default risk premium (DRP), liquidity premium (LP), and maturity risk premium (MRP). Define the nominal risk-free rate (rRF). What security can be used as an estimate of rRF? Describe a way to estimate the inflation premium (IP) for a T-Year bond. What is a bond spread and how is it related to the default risk premium? How are bond ratings related to default risk? What factors affect a company’s bond rating? What is reinvestment rate risk? Which has more reinvestment rate risk, a 1-year bond or a 10-year bond?How are interest rate risk and reinvestment rate risk related to the maturity risk premium? Briefly describe bankruptcy law. If a firm were to default on the bonds, would the company be immediately liquidated? Would the bondholders be assured of receiving all of their promised payments?

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