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 Harrington Horticulture Co.'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% Harrington Horticulture Co. issues 15-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 12.33% 11.48% 12.88% 5.55% ? ? Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O Higher inflation expectations increase the nominal interest rate demanded by investors O The yield on U.S. Treasury securities always remains static