Suppose the real risk$-$free rate is $2\mathrm{.}5\%,$ the average future inflation rate is $4\mathrm{.}8\%,$ a maturity premium of $0\mathrm{.}06\%$ per year to maturity applies, i$.$e$.,$ MRP $=0\mathrm{.}06\%(t),$ where $t$ is the years to maturity. Suppose also that a liquidity premium

of $0\mathrm{.}9\%$ and a default risk premium of $0\mathrm{.}7\%$ applies to A$-$rated corporate bonds.

How much higher would the rate of return be on a $7-$year A$-$rated corporate

bond than on a $5-$year Treasury bond. Here we assume that the pure expectations theory is NOT valid.

$1\mathrm{.}52\%$

$1\mathrm{.}12\%$

$1\mathrm{.}72\%$

$1\mathrm{.}32\%$

$1\mathrm{.}92\%$