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5. Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 4.20%, and a maturity risk premium of 0.10% per year
5. Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 4.20%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t-1), where t is the number of years to maturity, hence the pure expectations theory is NOT valid. What rate of retum would you expect on a 4-year Treasury security? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. a. 8.54% b. 8.70% c. 8.01% d. 7.92% e. 7.22% 6- Kay Corporation's 5-year bonds yield 7.50% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* - 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the default risk premium for Kay's bonds is DRP = 1.30% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP =(t-1) X0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Kay's bonds? a. 1.55% b. 1.87% c. 1.62% d. 1.80% e. 1.94%
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