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What is the amount of the total risk premium

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Reference no: EM132343702

Voice River, Inc. provides media-on-demand services via the Internet. Management has been studying current interest rates. A lender is willing to make a two-year loan to Voice River at a 13 percent annual interest rate. The U.S. government is currently paying 8 percent annual interest on its two-year securities.

A. If the real rate of interest is expected to be 3 percent annually, what is the inflation premium expected at this time?

B. What is the amount of the total risk premium that Voice River will have to pay?

C. If a 1 percent liquidity premium is built into the 13 percent rate, what is the default risk premium on the loan?

2. [Maturity and Default Risk Premiums]

Following is interest rate information currently being observed by the Electronic Publishing Corporation.

One-year U.S. government securities 3.5%

One-year bank loans 6.0

Five-year U.S. government securities 7.5

Five-year bank loans 9.5

A. What is the amount of the maturity risk premium on one-year versus five-year U.S. government securities?

B. What is the amount of the maturity risk premium on one-year versus five-year bank loans?

C. What is the default risk premium on one-year bank loans and on five-year bank loans?

Reference no: EM132343702

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