Assume That Real Risk-Free Rate (R*) = 1

Multiple Choice

Assume that real risk-free rate (r*) = 1.00%; the maturity risk premium is found as MRP = 0.20% × (t - 1) , where t = years to maturity; the default risk premium for AT&T bonds is found as DRP = 0.07% × (t - 1) ; the liquidity premium (LP) is 0.50 percent for AT&T bonds but zero for Treasury bonds; and inflation is expected to be 7 percent, 6 percent, and 5 percent during the next three years and then 4 percent thereafter. What is the difference in interest rates between 10-year AT&T bonds and 10-year Treasury bonds? (Round answer to two decimal places.)

A) 0.25%
B) 0.50%
C) 0.63%
D) 1.00%
E) 1.13%