Calculating Interest rates

The real risk-free (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 7% per year for each of the next three years and 6% thereafter.

The maturity risk premium (MRP) is determined from the formula: 0.1(t-1)%, where t is the security's maturity. The liquidity premiums (LP) on all BTR Warehousing's bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP):

Rating	Default Risk Premium
U.S. Treasury	-
AAA	0.60%
AA	0.80%
A	1.05%
BBB	1.45%

BTR Warehousing issues 11-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. Answers to choose from: (5.65%, 10.92%, 11.92%, 10.87%)

Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? Answers to choose from: (The yield on a AAA-rated bon will be higher than the yield on a BB-rated bond. Higher inflation expectations increase the nominal interest rate demanded by investors.)