Assume That Real Risk-Free Rate (R*) = 1

question 40

Multiple Choice

Assume that real risk-free rate (r*) = 1.00%; the maturity risk premium is found as MRP = 0.20% × (t - 1) , where t = years to maturity; the default risk premium for AT&T bonds is found as DRP = 0.07% × (t - 1) ; the liquidity premium (LP) is 0.50 percent for AT&T bonds but zero for Treasury bonds; and inflation is expected to be 7 percent, 6 percent, and 5 percent during the next three years and then 4 percent thereafter. What is the difference in interest rates between 10-year AT&T bonds and 10-year Treasury bonds? (Round answer to two decimal places.)

• A)0.25%
• B)0.50%
• C)0.63%
• D)1.00%
• E)1.13%

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Definitions:

Attaches

The process or moment when a legal right, interest, or lien is officially joined or connected to property or assets.

Secured Interest

A legal claim or lien on assets which is established to secure payment or performance of an obligation.

Default

Failure to fulfill a legal obligation, especially failing to make a required payment or perform a contractual duty.

Court Order

A directive issued by a judge that requires a party to do or abstain from doing something.