Suppose the real risk-free rate is 3.25%, the average future inflation rate is 4.35%, and a maturity risk premium of 0.07% per year to maturity applies to both corporate and T-bonds, i.e., MRP = 0.07%(t), where t is the number of years to maturity.  Suppose also that a liquidity premium of 0.50% and a default risk premium of 0.90% apply to A-rated corporate bonds but not to T-bonds. How much higher would the rate of return be on a 10-year A-rated corporate bond than on a 5-year Treasury bond?

	r	r*	IP	MRP	DRP	LP
Corporate
Treasury

Answer rating: 100% (QA)

The real riskfree rate is 325 The average inflation rate is 435 and maturity risk premium is 007 per ... View the full answer