An investor has two alternatives: AAA-rated corporate bond or Turkish Government Treasury bond. But the investor is not sure what rate of interest these two bonds should pay. Assume that the real risk-free rate of interest is 1.5%; inflation is expected to be 2.5%; the maturity risk premium is 3.5%; and, the default risk premium for AAA rated corporate bonds is 5.5%.

a) What is the "Rate of interest for the AAA-rated corporate bond" ?

b) What is the "Rate of interest for the Turkish Government Treasury bond"?

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