• Your company, Vestal Tools, Inc., is about to offer a new issue of corporate bonds to the investing marketplace. You have been asked by your CFO to provide a reasonable estimate of the nominal interest rate (nominal yield), Rd, for a new issue of Aaa-rated bonds to be offered by Vestal Tools.
• Some agreed-upon procedures related to generating estimates for key variables in the relevant equation, Rd = R*rf + IRP + DRP + MP + LP, are as follows:

1. Assume that the current (mid-2008, based on information provided in this case) financial market environment is considered representative of the prospective tone of the market near the time of the offering of the new bonds to the investing public. This means that current interest rates will be used as benchmarks for some of the variable estimates. All estimates will be rounded off to hundredths of a percent; thus, 6.288 becomes 6.29 percent.
2. The real risk-free rate of interest, R*rf, is the difference between the calculated average yield on 3-month Treasury bills and the inflation rate.
3. The inflation-risk premium, IRP, is the rate of inflation expected to occur over the life of the bond under consideration.
4. The default-risk premium, DRP, is estimated by the difference between the average yield on Aaa-rated bonds and 30-year Treasury bonds.
5. The maturity premium, MP, is estimated by the difference between the calculated average yield on 30-year Treasury bonds and 3-month Treasury bills.
6. Vestal Tools’ bonds will be traded on the New York Exchange for Bonds, so the liquidity premium, LP, will be slight. It will be greater than zero; however, because the secondary market for the firm’s bonds is more uncertain than that of some other tools producers, it is estimated at 3 basis points.

Note: A basis point is one one-hundredth of 1 percent. (E.g., 1 basis point = 0.01%; 25 basis points = 0.25%)