7. Calculating interest rates The real risk-free rate \\( \\left(r^{*}\ ight) \\) is \2.80 and is expected to remain constant into the future. Inflation is expected to be \3.20 per year for each of the next four years and \2.00 thereafter. The maturity risk premium (MRP) is determined from the formula: \0.10times(t1), where \\( t \\) is the security's maturity. The liquidity premium (LP) on all Sacramone Products Co.'s bonds is \1.10. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Sacramone Products Co. issues nine-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.) \6.93 \8.03 \7.23 \5.50 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 U.S. Treasury securities always remains static. In theory, the yield on a bond with a longer maturity will be higher than the yield on a bond with a shorter maturity
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