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Stu wants to earn a real return of 3.4 percent on any bond he acquires. The inflation rate is 2.8 percent. He has determined that a particular bond he is considering should have an interest rate risk premium of 0.27 percent, a liquidity premium of 0.08 percent, and a taxability premium of 1.69 percent. What nominal rate of return is Stu demanding from this particular bond

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Answer:

The question is missing the multiple choices given below:

Multiple Choice

7.38 percent  

8.24 percent

8.74 percent  

8.40 percent

7.19 percent

The correct answer is 8.24%

Explanation:

To start with, nominal rate return can be computed using the below formula:

nominal rate of return =real rate of return+inflation premium+interest rate risk premium+liquidity premium+taxability premium

real rate of return is 3.4%

inflation premium is 2.8%

interest rate risk premium is 0.27%,

liquidity premium is 0.08%

taxability premium is 1.69%

nominal rate of return =3.4%+2.8%+0.27%+0.08%+1.69%

                                     =8.24%

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