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9. Calculating interest rates Aa Aa The real risk-free rate (m) is 2.8% and is expected to remain constant. Inflation is expected to be 6%
9. Calculating interest rates Aa Aa The real risk-free rate (m) is 2.8% and is expected to remain constant. Inflation is expected to be 6% per year for each of the next four years and 5% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1 (t-1)%, where t is the security's maturity. The liquidity premium (LP) on all National Transmissions Corp. 's bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium U.S. Treasury 0.60% 0.80% 1.05% 1.45% National Transmissions Corp. issues six-year.AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. 10.82% 10.32% 9.77% 5.15% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O The yield on U.S. Treasury securities always remains static. Higher inflation expectations increase the nominal interest rate demanded by investors
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