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

The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 6% per year for each of the next five years and 5% thereafter.
The maturity risk premium (MRP) is determined from the formula: 0.1(t 1)%, where t is the securitys maturity. The liquidity premium (LP) on all BTR Warehousings bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP):
Rating
Default Risk Premium
U.S. Treasury
AAA 0.60%
AA 0.80%
A 1.05%
BBB 1.45%
BTR Warehousing issues ten-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.
5.55%
10.15%
11.05%
10.00%

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