7. Calculating interest rates The real risk-free rate (r) is 2.80% and is expected to remain constant into the future. Inflation is expected to be 7.50 % per year for each of the next three years and 6.30% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.10 x (t- 1) % , where t is the security's maturity. The liquidity premium (LP) on all Tahoe Hydroponics's bonds is 0.50 %. The following table shows the current relationship between bond ratings and default risk premiums (DRP)): Default Risk Premium Rating U.S. Treasury 0.60% AAA AA 0.80% 1.05% BBB 1.45% Tahoe Hydroponics issues ten-year, AA-rated bonds. What is the yield on one of these bonds? (Hint: Disregard cross-product terms; that is, if averaging is required, use an arithmetic average.) O 10.76% O 5.00% O 11.66% O 11.16 % Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O In theory, the yield on a bond with a longer maturity will be higher than the vield on a bond with a shorter maturity O A BBB-rated bond has a lower default risk premium as compared to a AAA-rated bond