An investor buys a 20-year Bbb-rated corporate bond with a nominal ann

An investor buys a 20-year Bbb-rated corporate bond with a nominal annual rate of return of 10%. The average
inflation rate is expected to be 2%. The default risk premium is expected to be 5% and the maturity premium is
4%.

Calculate the real rate of interest.

ANSWER

krf = k* + IRP + (k* × IRP)
10% = k* + 2% + (k* × 2%)
8% = 1.02 k*
7.84% = k*