The real risk$-$free rate $(r^{**})$ is $2\mathrm{.}8\%$ 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: $0\mathrm{.}1(t-1)\%,$ where $t$ is the security$\text{'}$s maturity. The liquidity premium $($LP$)$ on all

Smith and Carter Inc.$\text{'}$s bonds is $0\mathrm{.}55\%.$ The following table shows the current relationship between bond ratings and default risk premiums $($DRP$)$:

Smith and Carter 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.

$9\mathrm{.}57\%$

$10\mathrm{.}12\%$

$5\mathrm{.}25\%$

$10\mathrm{.}67\%$