Back to Assignment Attempts Keep the Highest / 2 7. Calculating interest rates The real risk-free rate (*) is 2.80% and is expected to remain constant into the future. Inflation is expected to be 4.05% per year for each of the next three years and 2.85% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.10 x (t - 1)%, where t is the security's maturity. The liquidity premium (LP) on all National Transmissions Corp.'s bonds is 1.10%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium U.S. Treasury AAA 0.60% AA 0.80% 1.05% BBB 1.45% National Transmissions Corp. issues seven-year, AA-rated bonds. What is the yield on one of these bonds? (Hint: Disregard cross-product terms; that is, if averaging is required, use an arithmetic average.) 08.06% 07.56% O 8.66% O 5.30% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O A BBB-rated bond has a lower default risk premium as compared to a AAA-rated bond. The yield on a AAA-rated bond will be lower than the yield on a AA-rated bond