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Calculating interest rates The real risk - free rate ( r * * ) is 2 . 8 0 % and is expected to remain
Calculating interest rates
The real riskfree rate is and is expected to remain constant into the future. Inflation is expected to be per year for each of the next
four years and thereafter.
The maturity risk premium MRP is determined from the formula: where is the securitys maturity. The liquidity premium LP on all
National Transmissions Corp.s bonds is The following table shows the current relationship between bond ratings and default risk premiums
DRP:
National Transmissions Corp. issues thirteenyear, AArated bonds. What is the yield on one of these bonds? Hint: Disregard crossproduct terms;
that is if averaging is required, use an arithmetic average.
Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true?
Higher inflation expectations increase the nominal interest rate demanded by investors.
The yield on US Treasury securities always remains static.
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