MC$\mathrm{.}06\mathrm{.}080$

Question $14$ of $40$

Suppose the real risk$-$free rate is $3\mathrm{.}25\%,$ the average future inflation rate is $4\mathrm{.}35\%,$ and a maturity risk premium of $0\mathrm{.}07\%$ per year to maturity applies to both corporate and T$-$bonds, i$.$e$.,$ MRP $=0\mathrm{.}07\%(t),$ where $t$ is the number of years to maturity. Suppose also that a liquidity premium of $0\mathrm{.}50\%$ and a default risk premium of $2\mathrm{.}40\%$ 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 $5-$y Treasury bond? Here we assume that the pure expectations theory is NOT valid. Disregard cross product terms, i$.$e$.,$ if averaging is required, use the arithmetic average.

a$.5\mathrm{.}65$ p$.$p$.$

b$.3\mathrm{.}75$ p$.$p$.$

c$.3\mathrm{.}25$ p$.$p$.$

d$.3\mathrm{.}46$ p$.$p$.$

e$.2\mathrm{.}90$ p$.$p$.$