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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Definitions:

Weiss' Eight Strategies

A set of tactics outlined by negotiation expert Jonathan Weiss aimed at improving negotiation outcomes through careful planning and execution.

Flexible

The trait of being able to adapt to changes and alter plans or strategies in response to new information or challenges.

Negotiating

Engaging in discussions with the goal of reaching an agreement.

Risks

Potential events or actions that may lead to loss or harm.