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I am looking at corporate bonds issued by Acme corp. Trying to determine what the nominal interest rate should be on them. Real risk- free interest rate is 3.1%, and is expected to continue on in the future without change. Inflation is expected to remain constant in the future at 3.3%. Default-risk premium is expected to remain constant at the rate of 1.8% . The liquidity risk is only 0.03% on the bonds. The maturity risk premium is dependent upon how many years the bond has to maturity. The maturity risk is as follows
Bonds Mature In Maturity Risk Premium
0-1 years........................................................0.06%
1-2 years 0.25%
2-3 years 0.70%
3-4 years 0.90%
Given this info what would the nominal rate of interest on Acme bonds maturing in 0-1 year ?, 1-2 years ?, 2-3 years, and 3-4 years?
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