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Calculating interest rates The real risk - free rate ( r * * ) is 2 . 8 % and is expected to remain constant.

Calculating interest rates
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 two 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):
\table[[Rating,Default Risk Premium],[U.S. Treasury,-],[AAA,0.60%
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