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The real risk-free rate (r*) is 2.80% and is expected to remain constant into the...

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Finance

The real risk-free rate (r*) 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 three years and 2.00% thereafter.

The maturity risk premium (MRP) is determined from the formula: 0.10 x (t 1)%, where t is the securitys maturity. The liquidity premium (LP) on all Tahoe Hydroponicss bonds is 0.50%. The following table shows the current relationship between bond ratings and default risk premiums (DRP):

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Rating Default Risk Premium U.S. Treasury AAA 0.60% AA 0.80% 1.05% BBB 1.45% Tahoe Hydroponics issues fourteen-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.) O 5.40% O 6.36% 07.16% O 7.66% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O The yield on U.S. Treasury securities always remains static. The yield on a AAA-rated bond will be lower than the yield on a AA-rated bond

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