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Unformatted text preview: maturity risk premium. A 7-year corporate bond has a yield of 7.6%. Assume that the liquidity premium on the corporate bond is 0.4%. What is the default risk premium on the corporate bond? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. A) 1.34% B) 2.20% C) 1.45% D) 2.01% E) 0.70% Points Earned: 5.0/5.0 Correct Answer(s): A 3. SCENARIO 6-3 Assume that the real risk-free rate, r*, equals 3%, and it is expected to be constant over time. Expected inflation is expected to be 3% in Year 1, 4% in Year 2, and 5% in Year 3. Assume that the maturity risk premium (MRP) = 0. What is the interest rate on Treasury securities that mature in three years? A) 7.5% B) 7.0% C) 6.5% D) 8.0% E) 6.0% Points Earned: 5.0/5.0 Correct Answer(s): B...
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