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Calculate the rate for the two year bond

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Reference no: EM133162400

Question - The risk free rate of interest is 2.0%. Inflation is expected to be 8.0% this year, 6.5% next year and 2.5% in each of the following years. Assume the liquidity premium is fixed at 0.5%; maturity risk premium is calculated to be .1% x (t-1); and default risk premium is fixed at 1.5% for years 1-5 and 2% for years 5-20. Calculate the rate for the following:

a) A 9 year bond?

b) A 2 year bond?

Reference no: EM133162400

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