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problem: Drongo Corporation’s four year bonds currently yield 7.4%. The real risk-free rate of interest, k*, is 2.7% & is supposed to be constant. The maturity risk premium [MRP] is estimated to be 0.1 %(t - 1), where t is equal to the time to maturity. The default risk & liquidity premiums for this company’s bonds total 0.9% and are believed to be the same for all bonds issued by this company. If the average inflation rate is expected to be 5% for years 5, 6, & 7, determine the yield on a 7-year bond for Drongo Corporation?

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