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 three years and 5.60% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.10 x (t-1), where is the security's maturity. The liquidity premium (LP) on all Tahoe Hydroponics's bonds is 0.60%. The following table shows the current relationship between bond ratings and default risk premiums (DAP): Rating Default Risk Premium U.S. Treasury Tahoe Hydroponics issues thirteen-year AA-rated bonds. What is the yield on one of these bonds? (Hint: Disregard cross product terms; that is, averaging is required, use an arithmetic average.) 5.40% 11.28% 10.08% 10.68% Based on your understanding of the determinants of interest rates, If everything else remains the same, which of the following will be true? A AAA-rated bond has less default risk than a BB-rated bond. The yield on a AAA-rated bond will be higher than the yield on a BB-rated bond. Save & Continue