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The real risk-free rate (*) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the
The real risk-free rate (*) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next five years and ? thereafter The maturity risk premium (MRP) is determined from the formula: 0.1( - 13%, where is the security's maturity. The liquidity premium (LP) on alt Rink Machine Co.'s bonds is 0.55%. The following table shows the current relationship between bord ratings and default risk premiums (DRP): Default Risk Premium Rating U.S. Treasury AAA 0.60% 0.80% AA 1.05% 1.45% BBB Rink Machine Co, issues 15-year, Mrated bonds. What is the yield on one of these bonds? Disregard cross product terms; that is, if averaging is required, use the arithmetic average. O 5.55% O 12.33% 11.48% 12.88% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? The yield on an AAA-rated bond will be higher than the yield on a 38-rated bond. An AAA-rated bond has less default risk than a 38-rated bond
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