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Unformatted text preview: 17. The real risk-free rate, r*, is expected to remain constant at 3%. Inflation is expected to average 2% per year for the next five years and then 3% per year thereafter. The maturity risk premium equals 0.1%(t - 1), where t = the bond's maturity. Currently, a 10-year corporate bond has a yield of 7.8%. What is the yield on a 15-year corporate bond that has the same default risk and liquidity premiums as the 10-year corporate bond? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. A) 8.80% B) 8.57% C) 9.80% D) 8.47% E) 8.30% Points Earned: 5.0/5.0 Correct Answer(s): D 18. Assume that r* = 2.0%; the maturity risk premium is found as MRP = 0.1%(t - 1), where t = years to maturity; the default risk premium for corporate bonds is found as DRP = 0.05%(t - 1); the liquidity premium is 1% for corporate bonds only; and inflation is expected to be 3%, 4%, and 5% during the next three years and then 6% thereafter. What is the difference in interest rates and 5% during the next three years and then 6% thereafter....
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