3. Calculating interest rates The real risk-free rate () is 2.8% and is expected to remain constant. Inflation is expected to be 3% per year for each of the next five years and 2% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.11 - 19%, where t is the security's maturity. The liquidity premium (LP) on all National Transmissions Corp.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Default Risk Premium Rating U.S. Treasury AAA 0.60% 0.80% AA 1.05% 1.45% National Transmissions Corp. issues 8-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. O 6.78% 7.48% O 6.93% 4.85% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? In theory, the yield on a bond with a longer maturity will be higher than the yield on a bond with a shorter maturity, A BBB-rated bond has a lower default risk premium as compared to an AAA-rated bond