Question: 4. Calculating interest rates The real risk-free rate (r* ) is 2.8% and is expected to remain constant. Inflation is expected to be 5%

4. Calculating interest rates The real risk-free rate (r* ) is 2.8% and is expected to remain constant. Inflation is expected to be 5% per year for each of the next three years and 4% 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 Sacramone Products Co.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium U.S. Treasury AAA BBB 0.60% 0.80% 1.05% 1.45% Sacramone Products Co. issues 10-year, AA-rated bonds. What is the yield on one of these bonds? Disregard -product terms; that is, if averaging is required, use the arithmetic average. cross O 8.80% O 5.05% O 8.45% 9.35%

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