?(Interest
rate
determination?)
? You're looking at some corporate bonds issued by? Ford, and you are trying to determine what the nominal interest rate should be on them. You have determined that the real? risk-free interest rate is
3.4 %3.4%?,
and this rate is expected to continue on into the future without any change. In? addition, inflation is expected to be constant over the future at a rate of
3.3 %3.3%.
The? default-risk premium is also expected to remain constant at a rate of
2.1 %2.1%?,
and the? liquidity-risk premium is very small for Ford? bonds, only about
0.05 %0.05%.
The? maturity-risk premium is dependent upon how many years the bond has to maturity. The? maturity-risk premiums are shown in the popup? window:
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. Given this? information, what should the nominal rate of interest on Ford bonds maturing in? 0-1 year,? 1-2 years,? 2-3 years, and? 3-4 years? be?
The nominal rate of interest on Ford bonds maturing in? 0-1 year should be
nothing?%.
?(Round to two decimal? places.)The nominal rate of interest on Ford bonds maturing in? 1-2 years should be
nothing?%.
?(Round to two decimal? places.)The nominal rate of interest on Ford bonds maturing in? 2-3 years should be
nothing?%.
?(Round to two decimal? places.)The nominal rate of interest on Ford bonds maturing in? 3-4 years should be
nothing?%.
?(Round to two decimal? places.)
BOND MATURES? IN: |
?MATURITY-RISK PREMIUM: |
|
?0-1 year |
0.070.07?% |
|
? 1-2 years |
0.450.45?% |
|
? 2-3 years |
0.800.80?% |
|
? 3-4 years |
0.100.10?% |
Nominal rate of interest when maturity period is 1 year = real risk free rate + inflation rate + default risk premium + liquidity premium + maturity Premium
Nominal rate of interest = 3.4+3.3 + 2.1+.05 + .07 = 8.92%
Nominal rate of interest when maturity period is 2 year = real risk free rate + inflation rate + default risk premium + liquidity premium + maturity Premium
Nominal rate of interest = 3.4+3.3 + 2.1+.05 + .45= 9.3%
Nominal rate of interest when maturity period is 3 year = real risk free rate + inflation rate + default risk premium + liquidity premium + maturity Premium
Nominal rate of interest = 3.4+3.3 + 2.1+.05+.8= 9.65%
Nominal rate of interest when maturity period is 4 year = real risk free rate + inflation rate + default risk premium + liquidity premium + maturity Premium
Nominal rate of interest = 3.4+3.3 + 2.1+.05+ 1= 9.85%
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