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3. Calculating interest rates The real risk-free rate (r) is 2.8% and is expected to remain constant. Inflation is expected to be 3% per year for each of the next five years and 2% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t1) w, where t is the security's maturity. The liquidity premium (LP) on all Lwkin Holdings Incis bonds is 1.05%, The following table shows the current relationship between bond ratings and defsult risk premiurns (DRP) : thian Roldings inc. istues 6.year, AAcated bonds. What is the vield on one of these bonds? Distegard cross-product terms; that is, if ayeraging is recuired, use the orithmetic average. 7.43% 6.934 Jukin Holdings inc. issues 6-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. 7.48% 6.93% 5.15% 7.98% Based on your understanding of the determinants of interest rates, If evervthing else remains the same, which of the following will be true? Higher inflation expectotions increase the nominal interest rate demanded by investors: The viela on an AMA-rated bond will be higher than the vield on a aB-rated bond. Jukin Holdings inc. issues 6-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. 7.48% 6.93% 5.15% 7.98% Based on your understanding of the determinants of interest rates, If evervthing else remains the same, which of the following will be true? Higher inflation expectotions increase the nominal interest rate demanded by investors: The viela on an AMA-rated bond will be higher than the vield on a aB-rated bond

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