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Question
Assume that r* = 1.0%; the maturity risk premium is found as MRP = 0.2%(t u2212 1) where t = years to maturity; the default risk premium for AT&T bonds is found as DRP = 0.07%(t u2212 1); the liquidity premium is 0.50% for AT&T bonds but zero for Treasury bonds; and inflation is expected to be 7%, 6%, and 5% during the next three years and then 4% thereafter. What is the difference in interest rates between 10-year AT&T bonds and 10-year Treasury bonds?
a. 0.25%
b. 0.50%
c. 0.63%
d. 1.00%
e. 1.13%
Answer
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