The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected...

The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 4% per year for each of the next three years and 3% thereafter.

The maturity risk premium (MRP) is determined from the formula: 0.1(t – 1)%, where t is the security’s maturity. The liquidity premium (LP) on all Global Satellite Corp.’s bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP):

AAA- 0.60%
AA- 0.80%
A- 1.05%
BBB- 1.45%

Global Satellite Corp. issues seven-year, AA-rated bonds. What is the yield on one of these bonds?

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jeff jeffy answered 7 months ago

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