Quantitative Methods 【Reading 5】Sample
Which one of the following statements best describes the components of the required interest rate on a security? A)
| The nominal risk-free rate, the expected inflation rate, the default risk premium, a liquidity premium and a premium to reflect the risk associated with the maturity of the security. |
| B)
| The real risk-free rate, the default risk premium, a liquidity premium and a premium to reflect the risk associated with the maturity of the security. |
| C)
| The real risk-free rate, the expected inflation rate, the default risk premium, a liquidity premium and a premium to reflect the risk associated with the maturity of the security. |
|
The required interest rate on a security is made up of the nominal rate which is in turn made up of the real risk-free rate plus the expected inflation rate. It should also contain a liquidity premium as well as a premium related to the maturity of the security. |