The Following Premiums Apply to a 3-Month Bond: Interest Rate

The following premiums apply to a 3-month bond: interest rate risk premium = 0.2 percent; real return = 1.9 percent; default premium = 0.8 percent; inflation premium = 1.4 percent.What is the expected nominal interest rate on a default-free security that has 3 months to maturity?

A) 1.9 percent
B) 2.0 percent
C) 2.1 percent
D) 3.3 percent
E) 3.6 percent

Correct Answer:

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