Assignment 06 - Interest Rates 4. Calculating interest rates Aa Aa The real risk-free rate (r) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next five years and 7% 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 Rink Machine Co.'s bonds is 1.05%. 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% 1.05% Rink Machine Co. issues 12-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. O O 0 12.07% 12.12% 5.75% 13.17% 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 lower than the yield on a AA-rated bond. The yield on U.S. Treasury securities always remains static. 0 verw 41 2004-2016 Ale Allots reserved 2010 Congage Learning except as noted. All rights reserved. Oraded Save & Continue Ke