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The real risk-free rate (r) is 2.8% and is expected to remain constant. Inflation is expected to be 7% per year for each of the next three years and 6% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t1)%, where t is the security's maturity. The liquidity premium (LP) on all Tahoe Hydroponics's bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Tahoe Hydroponics issues fourteen-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. 11.11% 12.16% 10.86% 5.95% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? In theory, the yield on a bond with a ionger maturity will be hiaher than the vielt on a havd wath a shorter mati.ui. Tahoe Hydroponics issues fourteen-year, AA-rated bonds. What is the yieid on one of these bonds? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. 11.11% 12.16% 10.86% 5.95% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? In theory, the yield on a bond with a longer maturity will be higher than the yield on a bond with a shorter maturity. A BBB-rated bond has a lower defaut risk premium as compared to an AAA-rated bond

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