Suppose the real risk-free rate is 2.7%, the average future…
Suppose the real risk-free rate is 2.7%, the average future inflation rate is 1.1%, a maturity premium of 0.08% per year to maturity applies, i.e., MRP = 0.08%(t), where t is the years to maturity. Suppose also that a liquidity premium of 0.9% and a default risk premium of 0.8% applies to A-rated corporate bonds. How much higher would the rate of return be on a 10-year A-rated corporate bond than on a 5-year Treasury bond. Here we assume that the pure expectations theory is NOT valid.
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