Question

?(Interest rate determination?) ? You're looking at some corporate bonds issued by? Ford, and you are...

?(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:

LOADING...

. 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?%
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Homework Answers

Answer #1

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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