Explanation:
The correct answer is A because the required interest rate on a security consists of several components:
Option A correctly includes all five components, while:
In fixed income analysis, the required rate of return (yield) is typically expressed as:
Required rate = Real risk-free rate + Expected inflation + Default risk premium + Liquidity premium + Maturity risk premium
This comprehensive framework captures all the risks investors face when holding a security.
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Which one of the following statements best describes the components of the required interest rate on a security?
A
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.
B
a liquidity premium and a premium to reflect the risk associated with the maturity of the security.
C
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.
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