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A ten-year U.S. Treasury bond has a 3.5 percent interest rate, while an identical maturity corporate bond has a 5.25 percent interest rate. Real interest

A ten-year U.S. Treasury bond has a 3.5 percent interest rate, while

an identical maturity corporate bond has a 5.25 percent interest rate.

Real interest rates and infl ation rate expectations would be the same

for the two bonds. If a default risk premium of 1.50 percentage points

is estimated for the corporate bond, determine the liquidity premium

for the corporate bond.

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