The real risk$-$free rate $(r^{**})$ is $2\mathrm{.}8\%$ and is expected to remain constant. Inflation is expected to be $3\%$ per year for each of the next five years and $2\%$ thereafter.

The maturity risk premium $($MRP$)$ is determined from the formula: $0\mathrm{.}1(t-1)\%,$ where $t$ is the security$\text{'}$s maturity. The liquidity premium $($LP$)$ on all Smith and Carter Inc.$\text{'}$s bonds is $1\mathrm{.}05\%.$ The following table shows the current relationship between bond ratings and default risk premiums $($DRP$)$:

$\backslash$table$[[$Rating$,$Default Risk Premium$],[$U$.$S$.$ Treasury,$-],[$AAA$,0\mathrm{.}60\%$