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 6% per year for each of the next five 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 BTR warehousing's bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium U.S. Treasury 0.60% 0.80% 1.05% 1.45% BTR Warehousing 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 10.05% 9.60% 10.60% 5.15% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? A BBB-rated bond has a lower default risk premium as compared to a AAA-rated bond. O The yield on a AAA-rated bond will be lower than the yield on a AA-rated bond