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Suppose the real risk-free rate is 3.5%, the average future inflation rate is 1%, a maturity premium of 0.08% per year to maturity applies, i.e.,
Suppose the real risk-free rate is 3.5%, the average future inflation rate is 1%, 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 1% and a default risk premium of 0.9% applies to A-rated corporate bonds. How much higher would the rate of return be on a 8-year A-rated corporate bond than on a 5 -year Treasury bond. Here we assume that the pure expectations theory is NOT valid. 2.14% 1.74% 2.34% 1.94% 2.54%
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