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22 December, 15:45

Stu wants to earn a real return of 3.4 percent on any bond he acquires. The inflation rate is 2.8 percent. He has determined that a particular bond he is considering should have an interest rate risk premium of 0.27 percent, a liquidity premium of 0.08 percent, and a taxability premium of 1.69 percent. What nominal rate of return is Stu demanding from this particular bond

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Answers (1)
  1. 22 December, 15:59
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    The question is missing the multiple choices given below:

    Multiple Choice

    7.38 percent

    8.24 percent

    8.74 percent

    8.40 percent

    7.19 percent

    The correct answer is 8.24%

    Explanation:

    To start with, nominal rate return can be computed using the below formula:

    nominal rate of return = real rate of return+inflation premium+interest rate risk premium+liquidity premium+taxability premium

    real rate of return is 3.4%

    inflation premium is 2.8%

    interest rate risk premium is 0.27%,

    liquidity premium is 0.08%

    taxability premium is 1.69%

    nominal rate of return = 3.4%+2.8%+0.27%+0.08%+1.69%

    =8.24%
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Home » Business » Stu wants to earn a real return of 3.4 percent on any bond he acquires. The inflation rate is 2.8 percent. He has determined that a particular bond he is considering should have an interest rate risk premium of 0.27 percent, a liquidity premium of 0.
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