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9. Calculating interest rates Aa Aa The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next five years and 7% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t-1)%, where t is the securitys maturity. The liquidity premium (LP) on all Rink Machine Co.s bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium US Treasury 0.60% 0.80% 1.05% 1.45% Rink Machine Co. issues 12-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. О 12.07% О 12.12% 0 5.75% О 13.17% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? O The yield on an AAA-rated bond will be lower than the yield on an AA-rated bond O The yield on US Treasury securities always remains statioc

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SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

Home nert Page Layout Formulas Data Review View dd-Ins s Cut aCopy Σ AutoSum ー E ゴWrap Text ,_a. ars-函Merge & Center, $, % , 弼,8 C Paste B l u. Conditional Format CeInsert Delete Format Formatting as Table Styles2 Clear Sort &Find & Format Painter Clipboard BS255 BP Font Alignment Number Styles Cells Edting BQ BR BS BT BU BV BW BX BY BZ CA 241 242 243 244 245 246 247 248 249 250 251 252 253 254 255 256 257 258 259 YIELD ON BOND = r* + IP +MRP + DRP + LP MRP = DRP LP = 2. 80% 7.42% ((896 X 5 ) + (796 x7))/12 1.10% 0.1*(12-1)% 0.80% FOR AA RATED BOND 1.05% ANS YIELD- 13.17% SUM(BT243:BT248) ANS THE YIELD ON AAA-RATED BOND WILL BE LOWER THAN THE YIELD ON AA-RATED BOND HIGHER THE RATING, LOWER THE YIELDS YIELD SPOT Sheet2 AFN BANKING NOTE BIDDING, UNDERWRITING EUAC AW PM LIFE LP ip, MRP INFLATION YIELD WARRANT fund bond CLEAN INVOICE PRICE LI 08:06 05-01-2019

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