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Suppose Kramerica Industries' 5-year corporate bonds yield 8%. The real risk-free rate, (r*) is 2%. Inflation is expected to be 6% this year, 5% next
Suppose Kramerica Industries' 5-year corporate bonds yield 8%. The real risk-free rate, (r*) is 2%. Inflation is expected to be 6% this year, 5% next year, 4% the following year and 3% per year thereafter. Kramerica's maturity risk premium is calculated using the formula, MRP = 0.1%* (t-1), where t = number of years to maturity. What is the yield on Kramerica's 10-year bonds given the same liquidity risk and default risk premiums apply to both the 5 and 10-year bonds? The maturity risk premium is calculated using the formula, MRP = 0.1%* (t-1), where t = number of years to maturity.
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