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The real risk-free rate (r) is 2.8% and is expected to remain constant. Inflation is...

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The real risk-free rate (r) is 2.8% and is expected to remain constant. Inflation is expected to be 4% per year for each of the next five years and 3% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t1)%, where t is the security's maturity. The liquidity premium (LP) on all Tahoe Hydroponics's bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Tahoe Hydroponics issues 14-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. 8.81% 7.51% 8.26% 5.45% Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? A BBB-rated bond has a lower default risk premium as compared to an AAA-rated bond. The yield on an AAA-rated bond will be lower than the yield on an AA-rated bond

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