Show your work with all steps included. This means making clear notations on assignments (write out formulas so they are visible-digging through assignments to find formulas is not acceptable). Show your work and the steps to the answer, you may be able to give partial credit. If you leave the problem blank, it is a zero for the problem. Show your work-if you just give a answer it will be marked completely wrong.

Upload an Excel, Word, or PDF file showing the answer and the supporting calculations. Clearly show your work with all steps included. If you are using mathematical formulas, write the formulas with all steps to get to the answer. If you are using a financial calculator, write out all the calculator keystrokes used. If you are using Excel, submit the file with formulas and the data entered into the formula.  Your work must be clearly visible. (Digging through your assignments to find formulas is not acceptable.) If you show your work and the steps to the answer, you may receive partial credit. If you only provide an answer with no supporting calculations, you will receive a zero for the problem.

Be sure to include your name in the file name and in the document itself.

6-2 Determinants of Interest Rates for Individual Securities You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that one-year T-bills are currently earning 1.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real risk-free rate = 0.75% Default risk premium = 1.15% Liquidity risk premium = 0.50% Maturity risk premium = 1.75% a. What is the inflation premium? (LG6-6) b. What is the fair interest rate on Moore Corporation 30-year bonds? (LG6-6)

6-14 Determinants of Interest Rates for Individual Securities NikkiG’s Corporation’s 10-year bonds are currently yielding a return of 6.05 percent. The expected inflation premium is 1.00 percent annually and the real risk-free rate is expected to be 2.10 percent annually over the next 10 years. The liquidity risk premium on NikkiG’s bonds is 0.25 percent. The maturity risk premium is 0.10 percent on two-year securities and increases by 0.05 percent for each additional year to maturity.

6-16 Unbiased Expectations Theory the Wall Street Journal reports that the rate on four-year Treasury securities is 1.60 percent and the rate on five-year Treasury securities is 2.15 percent. According to the unbiased expectations theory, what does the market expect?

6-18 Liquidity Premium Theory Suppose we observe the following rates: 1R1 = 0.75%, 1R2 = 1.20%, and E (2r1) = 0.907%. If the liquidity premium theory of the term structure of

6-22 Determinants of Interest Rates for Individual Securities the Wall Street Journal reports that the current rate on 8-year Treasury bonds is 5.85 percent, the rate on 15-year Treasury bonds is 6.25 percent, and the rate on a 15-year corporate bond issued by MHM Corp. is 7.35 percent. Assume that the maturity risk premium is zero. If the default risk premium and liquidity risk premium on an 8-year corporate bond issued by MHM Corp. are the same as those on the 15-year corporate bond,

6-26 Unbiased Expectations Theory the Wall Street Journal reports that the rate on three-year Treasury securities is 1.20 percent and the rate on five-year Treasury securities is 2.15 percent. According to the unbiased expectations theory, what does the market expect?