Question: Attempts: Average: /2 4. Calculating interest rates Aa Aa The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected

Attempts: Average: /2 4. Calculating interest rates Aa Aa The real

Attempts: Average: /2 4. Calculating interest rates Aa Aa 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 Tahoe Hydroponics's bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium U.S. Treasury 0.60% 0.80% 1.05% 1.45% Tahoe Hydroponics issues 13-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 O 9.95% O 9.80% 11.00% 5.85% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O The yield on U.S. Treasury securities always remains static. O In theory, the yield on a bond with a longer maturity will be higher than the yield on a bond with a shorter maturity

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