Assume that real risk-free rate (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%
Answer: E
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