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%
Answer: E
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