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Suppose the real risk-free rate is 2.8%, the average future inflation rate is 4.9%, a maturity premium of 0.05% per year to maturity applies, i.e.,
Suppose the real risk-free rate is 2.8%, the average future inflation rate is 4.9%, a maturity premium of 0.05% per year to maturity applies, i.e., MRP = 0.05% (t), where t is the years to maturity. Suppose also that a liquidity premium of 0.8% and a default risk premium of 1% applies to A-rated corporate bonds. How much higher would the rate of return be on a 9-year A-rated corporate bond than on a 5-year Treasury bond. Here we assume that the pure expectations theory is NOT valid. O 2.40% 2.10% 2.30% 2.00% O 2.20%
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