Ch 06: Assignment - Interest Rates The real risk-free rate (**) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next five years and 7% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t-1)%, wheret is the security's maturity. The liquidity premium (LP) on all Pandar Corp's bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DAP): Default Risk Premium Rating U.S. Treasury AAA 0.60% 0.80% A 1.05% BBB 1.45% ced Pandar Corp. issues eight-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, 4.85% 11.78% 12.48% 11.93% Based on your understanding of the determinants of interest rates, everything else remains the same, which of the following will be the A BBB-rated bond has a lower default risk premium as compared to an MA-rated bond. The yield on an AAA-rated bond will be lower than the yield on an At-rated bond