Multiple Choice
Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.50%, a maturity premium of 0.02% per year to maturity applies, i.e., MRP = 0.20%(t) , where t is the years to maturity. Suppose also that a liquidity premium of 0.50% and a default risk premium of 1.35% 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) 0.77%
B) 0.81%
C) 0.85%
D) 0.89%
E) 0.94%
Correct Answer:
Verified
Correct Answer:
Verified
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