Following is information about three bonds: ? ? Issuer Yield Time to Maturity Treasury 2.0% 6 months Company A 5.0 5 years Company B 5.3 8 years ? Although none of the bonds has a liquidity
premium, any bond with a maturity equal to one year or greater has a maturity risk premium (MRP). Except for their terms to maturity, the characteristics of the Company A and Company B bonds are the same (including their default risk). The average inflation rate is expected to remain constant during the next 10 years. What is the annual MRP?
A. 0.1%
B. 1.1%
C. 1.0%
D. 0.7%
E. 4.1%
Answer: A
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