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What are the different components for a 30- year old AAA rated Communication Technology company? Formula...

What are the different components for a 30- year old AAA rated Communication Technology company?

Formula used: rd = r* + IP + DRP + LP + MRP



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Answer #1

Nominal rate = r* + IP + DRP + LP + MRP

r* - real rate of return

IP - Inflation premium, depending on the inflation outlook for the next 30 year.

DRP - Default risk premium depends on the credit rating, which is AAA for this firm. Higher the credit ratings, lower the DRP

LP - Liquidity Premium depends on the liquidity of the bond in the market. Long duration bonds typically have low liquidity and hence, require relatively higher premium than short term bonds.

MRP - Maturity Risk Premium again depends on the duration of the bond. Longer maturity bonds have higher interest rate risk in comparison to the shorter term bonds and hence, requires higher maturity premium.

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