According to Saunders and Cornett (2015), “Time value of money is the basic notion that a dollar received today is worth more than a dollar received at some future date” (p. 49). In this assignment, you are expected to demonstrate your understanding of this concept by writing a two to four-page response to the questions presented below.
1.A security’s equilibrium rate of return is 7 percent. For all securities, the inflation risk premium is 1.65 percent and the real interest rate is 3.25 percent. The security’s liquidity risk premium is .25 percent and maturity risk premium is .75 percent. The security has no special covenants.
What is the security’s default risk premium?
What is the inflation premium? What is the fair interest rate on Moore Corporation 30-year bonds?
If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2?
What do your answers tell you about the relation between present values and interest rates and between present values and the number of compounding periods per year?
What do your answers to these questions tell you about the relation between future values and interest rates and between future values and the number of compounding periods per year?
What is the interest rate on this annuity?
Your response must adhere to the following standards:
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