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Unformatted text preview: 17. The real riskfree 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 10year corporate bond has a yield of 7.8%. What is the yield on a 15year corporate bond that has the same default risk and liquidity premiums as the 10year corporate bond? Disregard crossproduct 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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 Spring '09
 SHMIDL
 Finance, Inflation

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