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b. Suppose you are considering two possible imvestment opportunities: a 12-year Treasury bond and a 7-year, A-rated corporate bond. The current real risk-free rate is
b. Suppose you are considering two possible imvestment opportunities: a 12-year Treasury bond and a 7-year, A-rated corporate bond. The current real risk-free rate is 5%, and inflabion is expected to be 2% for the next 2 years, 3% for the following 4 vears, and 4% thereafter. The maturity risk premium is estimated by this formula: M.P =0.01(t1)%. The liquidity premlum (UP) for the corporate band is estimated to be 0.2%. You may determine the defoult risk premum (ORP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporete spread given in the table to arrive at the bond's DRP. What yeid would you predict for each of these two investments? Round your answers to three dedmal places. 12.year Treasury vield: 7-year Corporate viesd: %
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