Assume That R* = 2

Multiple Choice

Assume that r* = 2.0%;the maturity risk premium is found as MRP = 0.1%(t − 1) where t = years to maturity;the default risk premium for corporate bonds is found as DRP = 0.05%(t − 1) ;the liquidity premium is 1.0% for corporate bonds only;and inflation is expected to be 3%,4%,and 5% during the next three years and then 6% thereafter.What is the difference in interest rates between 10-year corporate and Treasury bonds?

A) 0.45%
B) 1.45%
C) 2.20%
D) 2.75%
E) 3.25%