Question
The real risk-free rate on interest, r* is 2.7%, and it is expected to remain constant over time. Inflation is expected to be 6% per
The real risk-free rate on interest, r* is 2.7%, and it is expected to remain constant over time. Inflation is expected to be 6% per year for the next 2 years, 4.5% for the next 3 years, and 3% for the following 4 years. The MRP = 0.1 x (t - 1)%, where t = the bond's maturity. The default risk premium for a BBB-rated bond is 2.1%. Calculate the 6-year arithmetic average of the expected inflation, and the yield on a 6-year BBB-rated corporate bond with a liquidity premium of 1.45%.
Group of answer choices
4.68%; 8.85%
5.25%; 8.80%
5.10%; 8.61%
4.88%; 8.79%
4.75%; 8.75%
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