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The inflation risk premium on a bond is 2 percent, the U
The inflation risk premium on a bond is 2 percent, the U.S. T-bill rate is 5 percent, the maturity risk
premium on the bond is 3 percent, the default risk premium on the bond is 2 percent, and the liquidity risk
premium on the bond is 1 percent. Calculate its nominal rate of return.
Expert Solution
Computation of the nominal rate of return:-
Nominal rate of return = U.S. T-bill rate + Inflation risk premium + Maturity risk premium + Default risk premium + liquidity risk premium
= 5% + 2% + 3% + 2% + 1%
= 13%
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