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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 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 two years and 5% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t 1)%, where t is the security's maturity. The liquidity premium (LP) on all Moq Computer Corp.'s bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating U.S. Treasury Default Risk Premium AAA 0.60% AA 0.80% A 1.05% BBB 1.45% Moq Computer Corp. issues 8-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. 5.35% 10.60% 9.90% 9.55%
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