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home / study / business / finance / finance questions andanswers / suppose the real risk-free rate is 3.25%, the averagefuture inflation rate is 4.35%, and a ... Question: Suppose thereal risk-free rate is 3.25%, the average future inflation rate is4.35%, and a matur... Suppose the real risk-free rate is 3.25%, theaverage future inflation rate is 4.35%, and a maturity risk premiumof 0.07% per year to maturity applies to both corporate andT-bonds, i.e., MRP = 0.07%(t), where t is the number of years tomaturity. Suppose also that a liquidity premium of 0.50% and adefault risk premium of 2.50% apply to A-rated corporate bonds butnot to T-bonds. How much higher would the rate of return be on a10-year A-rated corporate bond than on a 5-year Treasury bond? Herewe assume that the pure expectations theory is NOT valid. Disregardcross-product terms, i.e., if averaging is required, use thearithmetic average.

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home / study / business / finance / finance questions andanswers / suppose the real risk-free rate is 3.25%, the averagefuture inflation rate is 4.35%, and a ... Question: Suppose thereal risk-free rate is 3.25%, the average future inflation rate is4.35%, and a matur... Suppose the real risk-free rate is 3.25%, theaverage future inflation rate is 4.35%, and a maturity risk premiumof 0.07% per year to maturity applies to both corporate andT-bonds, i.e., MRP = 0.07%(t), where t is the number of years tomaturity. Suppose also that a liquidity premium of 0.50% and adefault risk premium of 2.50% apply to A-rated corporate bonds butnot to T-bonds. How much higher would the rate of return be on a10-year A-rated corporate bond than on a 5-year Treasury bond? Herewe assume that the pure expectations theory is NOT valid. Disregardcross-product terms, i.e., if averaging is required, use thearithmetic average.