$3.$ Calculating interest rates

The real risk$-$free rate $($r$*)$ is $2\mathrm{.}8\%$ and is expected to remain constant. Inflation is expected to be $4\%$ per year for each of the next two years and $3\%$ thereafter.

The maturity risk premium $($MRP$)$ is determined from the formula: $0\mathrm{.}1($t $1)\%,$ where t is the security$$s maturity. The liquidity premium $($LP$)$ on all Rinsemator Group$$s bonds is $0\mathrm{.}55\%.$ The following table shows the current relationship between bond ratings and default risk premiums $($DRP$)$:

Rating

Default Risk Premium

U$.$S$.$ Treasury $$

AAA $0\mathrm{.}60\%$

AA $0\mathrm{.}80\%$

A $1\mathrm{.}05\%$

BBB $1\mathrm{.}45\%$

Rinsemator Group issues nine$-$year, AA$-$rated bonds. What is the yield on one of these bonds? Disregard cross$-$product terms; that is$,$ if averaging is required, use the arithmetic average.

$4\mathrm{.}95\%$

$8\mathrm{.}17\%$

$7\mathrm{.}37\%$

$7\mathrm{.}62\%$