Suppose the Real Risk-Free Rate Is 3

question 34

Multiple Choice

Suppose the real risk-free rate is 3.50%,the average future inflation rate is 2.50%,a maturity premium of 0.20% per year to maturity applies,i.e. ,MRP = 0.20%(t) ,where t is the number of years to maturity.Suppose also that a liquidity premium of 0.50% and a default risk premium of 2.70% applies to A-rated corporate bonds.What is the difference in the yields on a 5-year A-rated corporate bond and on a 10-year Treasury bond? Here we assume that the pure expectations theory is NOT valid,and disregard any cross-product terms,i.e. ,if averaging is required,use the arithmetic average.

• A) ​1.91
• B) 2.20​
• C) 2.27​
• D) 2.13​
• E) 1.78​

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