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2 . Let us assume the real Rf is 5 . 5 0 % , the average future inflation rate is 1 . 5 0

2.Let us assume the real Rf is 5.50%, the average future inflation rate is 1.50%, a maturity premium of 0.60% per year to maturity applies, i.e., Maturity Premium =0.60%(t), where t is the years to maturity [which means, Maturity Premium =0.60% times t years]. Assume also that a liquidity premium of 0.90% and a default risk premium of 0.70% applies to A-rated corporate bonds. i) What is the maturity premium of the 6-year A-rated corporate bond? ii)What is the maturity premium of the 8-year Treasury bond? What is the yield (i.e. the required return) on a 6-year A-rated corporate bond?

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