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Suppose the real risk-free rate is 1.9%, the average future inflation rate is 4.4%, a maturity premium of 0.08% per year to maturity applies, i.e.,

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Suppose the real risk-free rate is 1.9%, the average future inflation rate is 4.4%, a maturity premium of 0.08% per year to maturity applies, i.e., MRP = 0.08%(t), where t is the years to maturity. Suppose also that a liquidity premium of 0.7% and a default risk premium of 1% applies to A-rated corporate bonds. How much higher would the rate of return be on a 6-year A-rated corporate bond than on a 5-year Treasury bond. Here we assume that the pure expectations theory is NOT valid. \begin{tabular}{l} \hline 1.58% \\ \hline 2.38% \\ \hline 2.18% \\ \hline 1.78% \\ \hline 1.98% \end{tabular}

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