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The real risk - free rate ( r * * ) is 2 . 8 % and is expected to remain constant. Inflation is expected

The real risk-free rate (r**) is 2.8% and is expected to remain constant. Inflation is expected to be 4% per year for each of the next two years and 3%
thereafter.
The maturity risk premium (MRP) is determined from the formula: 0.1(t-1)%, where t is the security's maturity. The liquidity premium (LP) on all
Nitreca Chemicals Inc.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP):
Nitreca Chemicals Inc. issues twelve-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if
averaging is required, use the arithmetic average.
5.25%
7.87%
8.42%
7.32%
Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following whbe true?
In theory, the yield on a bond with a longer maturity will be higher than the yield on a bond with a shorter maturity.
The yield on U.S. Treasury securities always remains static.
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