## Question

###### A particular security's default risk premium is 2 percent. For all securities, the inflation risk premium...

A particular security's default risk premium is 2 percent. For all securities, the inflation risk premium is 175 percent and the real risk- free rate is 150 percent. The security's liquidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent. The security has no special covenants. Calculate the security's equilibrium rate of return (Round your answer to 2 decimal places.) Rate of retum

## Answers

Default risk premium = 2%

Inflation risk premium = 1.75%

Real risk-free rate = 1.50%

Liquidity risk premium = 0.25%

Maturity risk premium = 0.85%

Equilibrium rate of return = 2% + 1.75% + 1.50% + 0.25% + 0.85%

Equilibrium rate of return = 6.35%

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