Inflation and Risk Premiums-Voice River, Inc., provides media-on-demand services via the Internet. Management has been studying current interest rates. A lender is willing to make a two-year loan to Voice River at a 12 percent annual interest rate. The U.S. government is currently paying 8 percent annual interest on its two-year securities.
A. If the real rate of interest is expected to be 3 percent annually, what is the inflation premium expected at this time?
B. What is the amount of the total risk premium that Voice River will have to pay?
C. If a 1 percent liquidity premium is built into the 12 percent rate, what is the default risk premium on the loan?
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