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Question(s) / Instruction(s):

A particular securitys default risk premium is 2 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 3.5 percent. The securitys liquidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent. The security has no special covenants.

Required:

Calculate the securitys equilibrium rate of return.

Problem 8-1

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