Question

A particular security's default risk premium is 2 percent. for all securities, the inflation risk premium is 1.75 percent and the real risk-free rate is 3.5 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.

Answer 1

To solve this problem and calculate the security's equilibrium rate of return, you should sum the security's default risk premium (2.00%), the inflation risk premium (1.75%), the real risk-free rate (3.50%), the security's liquidity risk premium (0.25%) and the maturity risk premium (0.85%). So, you have:
 
 ij*=2.00%+1.75%+3.50%+0.25%+0.85%
 ij*=8.35%