2/19/25 BUSA 3150 – Business Finance Walton
Chapter 5
Learning Objective 5 & 6
5.5 Risk-Free Rate and Premiums:
Difference between nominal rates:
The level of risk of the investment or loan (Default Premium)
The length of the investment or loan (Maturity Premium)
Risk Free Rate (rf): A theoretical interest rate with zero risk of any kind
Real Nominal
Risk- r* r f =r∗+h
free (Treasury Bill)
Risky r =r∗+ h+dp
(Annual
Percentage Rate)
Interest rate formula with default premium and maturity premium:
r =r∗+ h+dp+ mp
Liquidity premium: The additional return required by an investor when an
asset cannot be easily converted to cash at its fair market value in a
reasonable amount of time.
5.6 Yield Curves
Yield curve: The graphed relationship between the return rate and an
asset’s time to maturity
Chapter 5
Learning Objective 5 & 6
5.5 Risk-Free Rate and Premiums:
Difference between nominal rates:
The level of risk of the investment or loan (Default Premium)
The length of the investment or loan (Maturity Premium)
Risk Free Rate (rf): A theoretical interest rate with zero risk of any kind
Real Nominal
Risk- r* r f =r∗+h
free (Treasury Bill)
Risky r =r∗+ h+dp
(Annual
Percentage Rate)
Interest rate formula with default premium and maturity premium:
r =r∗+ h+dp+ mp
Liquidity premium: The additional return required by an investor when an
asset cannot be easily converted to cash at its fair market value in a
reasonable amount of time.
5.6 Yield Curves
Yield curve: The graphed relationship between the return rate and an
asset’s time to maturity
