3. Calculating interest rates The real risk-free rate (r) is 2.8% and is expected to remain constant. Inflation is expected to be 5% per year for each of the next two years and 4% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t1)%, where t is the security's maturity. The liquidity premium (LP) on all Smith and Carter incis bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Smith and Carter Inc, issues thirteen-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. 9.50% 8. 30% 8.95\% 5.35% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? The yieid on an AaA-rated bond will be lower than the yield on an AA-rated bond. The yield on U.S. Treasury securities always remains static