4. Calculating interest rates Aa Aa The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next five years and 790 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 Pellegrini southern Inc.'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 0.60% 0.80% 1.05% 1.45% Pellegrini Southern Inc. issues 14-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 5.45% O 12.26% ? 11.51% ? 12.81% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? A AAA-rated bond has less default risk than a BB-rated bond The yield on U.S. Treasury securities always remains static