Calculating interest rates

The real risk$-$free rate $(r^{*})$ is $2\mathrm{.}8\%$ and is expected to remain constant. Inflation is expected to be $6\%$ per year for each of the next five years and $5\%$

thereafter.

The maturity risk premium $($MRP$)$ is determined from the formula: $0\mathrm{.}1(t-1)\%,$ where $t$ is the security$\text{'}$s maturity. The liquidity premium $($LP$)$ on all

Nitreca Chemicals Inc.$\text{'}$s bonds is $0\mathrm{.}55\%.$ The following table shows the current relationship between bond ratings and default risk premiums $($DRP$)$:

Nitreca Chemicals Inc. issues $15-$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.

$10\mathrm{.}33\%$

$10\mathrm{.}88\%$

$9\mathrm{.}48\%$

$5\mathrm{.}55\%$

Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true?

In theory, the yield on a bond with a longer maturity will be higher than the yield on a bond with a shorter maturity.

The yield on U$.$S$.$ Treasury securities always remains static.