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40. Suppose the real risk-free rate is 3.5%, the average inflation rate is 2.5%, a maturity risk premium of 20% per year to maturity applies,

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40. Suppose the real risk-free rate is 3.5%, the average inflation rate is 2.5%, a maturity risk premium of 20% per year to maturity applies, i.e., MRP - 20%(t), where t is the number of years to maturity. Suppose also that a liquidity premium of 50% and a default risk premium of 1.35% applies to A-rated corporate bonds. What is the difference in the yields on a 5-year A-rated bond and on a 10-year Treasury bond? A) 77%; B) .81%; C) .85%; D) 89%; E) 94%

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