ting interest rates The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 3% per year for each of the next five years and 2% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t - 19%, where t is the security's maturity. The liquidity premium (LP) on all Harrington Horticulture Co.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (ORP): Default Risk Premium Rating U.S. Treasury AAA 0.609 AA 0.80% 1.05% A 1.45% Harrington Horticulture Co. Issues eight-year, AA rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, ir averaging is required, use the arithmetic average. 7.48% 6.939 6.78% 6.4.85 Based on your understanding of the determinants of interest rates, If everything else remains the same, which of the following will be true? A 60-rated bond has a lower default risk premium as compared to an AM rated bond. Ch 06: Assignment - Interest Rates (DRP); Rating U.S. Treasury Default Risk Premium AAA 0.60% 0.80% A 1.05% BBB 1.45% Harrington Horticulture Co. Issues eight-year, A-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, ir averaging is required, use the arithmetic average. 0.7.48% 6.93% 6.78% 4.85% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? A BBB-rated bond has a lower default risk premium as compared to an AAA-rated bond. The yield on an AAA-rated bond will be lower than the yield on an AA-rated bond