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 6.80% per year for each of the next four years and 5.60% 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 National Transmissions Corp.'s bonds is 1.20%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Default Risk Premium Rating U.S. Treasury AAA 0.60% AA 0.80% A 1.05% BBB 1.45% National Transmissions Corp. issues fifteen-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.) 6.20% 10.92% 10.72% 12.12% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? The yield on a AAA-rated bond will be higher than the yield on a BB-rated bond. Higher inflation expectations increase the nominal interest rate demanded by investors