Calculating interest rates:

The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 390 per year for each of the next two years and 2% 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 BTR warehousing's bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP) Rating U.S. Treasury Default Risk Premium 0.60% 0.80% 1.05% 1.45% BTR Warehousing issues nine-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. 7.17% 6.37% 6.62% 0 4.95% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O The yield on U.S. Treasury securities always remains static O A AAA-rated bond has less default risk than a BB-rated bond