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  3. 4. calculating interest rates the real risk-free r

4. Calculating interest rates The real risk-free rate (r) is 2.8% and is expected to...

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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 is the security's maturity. The liquidity premium (LP) on all Liukin Holdings Inc.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (ORP): Default Risk Premium Rating U.S. Treasury AAA 0.6096 AA 0.809 1.0596 A BBB 1.45% Liukin Holdings Inc. issues ten-year, at-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. 9.35% 05.05% 8.80 Ls 8,45% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? The yield on a AAA-rated bond will be higher than the yield on a BB-rated bond. AMA-rated bond has less default risk than a BB-rated bond

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