You are considering an investment in a AAA-rated U.S. corporate bond b

You are considering an investment in a AAA-rated U.S. corporate bond but you are not sure what
rate of interest it should pay.

Assume that the real risk-free rate of interest is 1.0%; inflation is
expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA
rated corporate bonds is 3.5%. What rate of interest should the U.S. corporate bond pay?
A) 5.0% B) 8.5% C) 2.5% D) 6.0%

ANSWER

B