20.

Suppose the real risk-free rate is 3.60%, the average future inflation rate is 4.50%, and a maturity risk premium of 0.06% per year to maturity applies to both corporate and T-bonds, i.e., MRP -0.06%(t), where t is the number of years to maturity. Suppose also that a liquidity premium of 0.50% and a defnult risk premium of 1.80% apply to A-rated corporate bonds but not to T-bonds. How much higher would the rate of return be on a 10-year A-rated corporate bond than on a 5-year Treasury bond? Here we assume that the pure expectations theory is NOT valid, Disregard cross-product terms, i.e. If averaging is required. use the arithmetic average. O a. 2.74 p.p. b. 230 p.p. O c.2.60 p. d. 3.10 p.p. O e. 4.40 pp