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Risk Premiums: Eleanor is attempting to find the nominal rate of interest for each of...

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Accounting

Risk Premiums: Eleanor is attempting to find the nominal rate of interest for each of two securities, A and B, issued by different firms at the same point in time. She has gathered the following data.

Characteristic Security A Security B

Time to maturity 3 years 15 years

Inflation premium 9.0% 7.0%

Risk Premium for:

Liquidity risk 1.0% 1.0%

Default risk 1.0% 2.0%

Maturity risk 0.5% 1.5%

Other risk 0.5% 1.5%

If the real rate of interest is currently 2%, find the risk-free rate of interest applicable to each security.

Find the total risk premium attributable to each security

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