3. Calculating interest rates The real risk-free rate (*) is 2.8% and is expected to remain constant. Inflation is expected to be 6% per year for each of the next five years and 5% thereafter The maturity risk premium (MRP) is determined from the formula: 0.1(t-1)%, where is the security's maturity. The liquidity premium (LP) on all Moq Computer Corp's bonds is 0.55%. The following table shows the current relationship between band ratings and default risk premiums (ORP): Default Risk Premium Rating U.S. Treasury AAA 0.60% 0.80% 1.05% BBB 1.45% Mon Computer Corp. issues 13-year, AArated bonds. What is the yield on one of these bonds? Disregard cross product terms; that is, if averaging is required, use the arithmetic average 10.18% 5.35% 10.73% 9.53% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? An AAA-rated bond has less default risk than a 38-rated bond. Ch 06: Assignment - Interest Rates The real risk-free rate (r) is 2.8% and is expected to remain constant. Inflation is expected to be 6% per year for each of the next five years and 5% thereafter The maturity risk premium (MRP) is determined from the formula: 0.1(t-1)%, where t is the security's maturity. The liquidity premium (LP) on all Moq Computer Corp's bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium U.S. Treasury AAA 0.60% AA 0.80% A 1.05% BBB 1.45% Moq Computer Corp. issues 13-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. 10.18% 5.35% 10.73% 9.53% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? An AAA-rated bond has less default risk than a 8-rated bond. The yield on U.S. Treasury securities always remains static