Business Finance
Calculate a table of interest rates based on the following information

Question Description

•The pure interest rate is 1.6%. •Inflation expectations for year 1 = 3%, year 2 =3.5%, years 3-5 =5%. •The default risk is .1% for year one and increases by .2% over each year. •Liquidity premium is 0 for year 1 and increases by .2% each year. •Maturity risk premium is 0 for years 1 and 2 and .2% for years 3-5

Final Answer

int rate = pure int rate + inflation + default risk + liquidity premium + maturity risk premiumyear 1
= 1.6 + 3 + .1 + 0 + 0
= 4.7%year 2 = 1.6 + 3.5 + .3 + .2 + 0
= 5.8%year 3 = 1.6 + 5 + .5 + .4 + .2
= 7.7%year 4 = 1.6 + 5 + .7 + .6 + .2
= 8.1%year 5 = 1.6 + 5 + .9 + .8 + .2 = 8.5%

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University of Maryland

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