4. Calculating interest rates Aa Aa E 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 four 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 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% BBB 1.45% National Transmissions Corp. issues 11-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 O O O 9.51% 5.15% 9.96% 10.51% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? E EEEEEE O A BBB-rated bond has a lower default risk premium as compared to a AAA-rated bond. O A AAA-rated bond has less default risk than a BB-rated bond