You are considering investing in a 3-year BBB-rated corporate bond issued by BHP Billiton, a mining company. Assume that the 3-year Treasury bonds pay 5% p.a. Inflation is expected to be 1.5% p.a. The maturity risk premium is 2.5% p.a., and the default risk premium for A-rated corporate bonds is 3% p.a. If the liquidity-risk premium for a BBB-rated corporate bond, A-rated corporate bond and the Treasury bond are the same, what rate of interest below is more appropriate for the BBB-rated corporate bond to pay?

a.

9.5%

b.

7%

c.

8%

d.

6.5%