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You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds...

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Finance

You are considering an investment in 30-year bonds issued by Moore
Corporation. The bonds have no special covenants. The Wall Street Journal
reports that 1-year T-bills are currently earning 3.25%. Your broker has
determined the following information about economic activity and Moore
Corporation bonds:
Real risk-free rate =2.25%
Default risk premium =1.15%
Liquidity risk premium =0.50%
Maturity risk premium =1.75%
a. What is the inflation premium? (hint: use the approximation in Lec 3
slides page 25..)
b. What is the fair interest rate on Moore Corporation 30-year bonds? (hint:
assume function f(dots) on page 24 of Lec 3 slides is a simple
summation)
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