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A particular security’s default risk premium is 3 percent. For all securities, the inflation risk premium...

A particular security’s default risk premium is 3 percent. For all securities, the inflation risk premium is 2.90 percent and the real risk-free rate is 3.50 percent. The security’s liquidity risk premium is 0.10 percent and maturity risk premium is 0.70 percent. The security has no special covenants. Calculate the security’s equilibrium rate of return. (Round your answer to 2 decimal places.)

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Answer #1

Security's equilibrium rate of return

= DRP + Inflation risk premium + real risk free rate + Liquidity risk premium + maturity risk premium

= 3% + 2.90% + 3.50% + 0.10% + 0.70%

= 10.20%
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