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You're looking at some corporate bonds issued by Ford, and you are trying to determine what the nominal interest rate should be on them. You have...
You’re looking at some corporate bonds issued by
Ford, and you are trying to determine what the nominal interest rate should be on
them. You have determined that the real risk-free interest rate is 3.0%, and this rate is expected to continue on into the future without any change. In addition, inflation isexpected to be constant over the future at a rate of 3.0%. The default-risk premium isalso expected to remain constant at a rate of 1.5%, and the liquidity-risk premium isvery small for Ford bonds, only about 0.02%. The maturity-risk premium is dependenton how many years the bond has to maturity. The maturity-risk premiums areas follows:
BOND MATURES IN: MATURITY-RISK PREMIUM:0–1 year 0.07%1–2 years 0.35%2–3 years 0.70%3–4 years 1.00%
Given this information, what should the nominal rate of interest on Ford bonds maturingin 0–1 year, 1–2 years, 2–3 years, and 3–4 years be?
