Given the rate information in the table below, estimate the nominal ra

Given the rate information in the table below, estimate the nominal rate for a AA-rated corporate bond.
Assume a liquidity premium of 8 basis points.

Identify as part of your answer the inflation risk premium, the
default risk premium, the maturity premium, and the liquidity premium.
3-month T-bills 2.0%
30-year Treasury bonds 5.0%
AA-rated corp. bonds 8.0%
Inflation Rate 1.0%

ANSWER

k* = 2.0% – 1.0% = 1.0%
IRP = 1.0%
DRP = 8.0% – 5.0% = 3.0%
MP = 5.0% – 2.0% = 3.0%
LP = .08% (given)
K = 1.0% + 1.0% + 3.0% + 3.0% + .08% = 8.08%