Assume That R* = 1

Multiple Choice

Assume that r* = 1.0%;the maturity risk premium is found as MRP = 0.2%(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 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%