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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 5%

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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 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(t - 1)%, where t is the security's maturity. The liquidity premium (LP) on all Rinsemator Group's bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium US Treasury AAA 0.60% 0.80% AA A 1.05% B 1.45% Rinsemator Group 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. O 8.28% 5.55% O 9.68% O 9.13% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O An AAA-rated bond has less default risk than a BB-rated bond O The yield on an AAA-rated bond will be higher than the yield on a BB-rated bond

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