Suppose that you are considering the purchase of a 20–year Treasury bond, a
20–year Tesla, Inc. corporate bond, and the common stock of Tesla. The current risk premiums are provided:
Maturity risk premium 3.00%
Default risk premium 4.00%
Real risk free rate 1.00%
Seniority risk premium 5.50%
Inflation premium 0.50%
Liquidity premium 2.00%
Required:
Determine the required rate of return for all three securities based on the information provided above.
Sample Solution