1. Treasury securities that mature in 7 years currently have an interest rate of 10.5%. Inflation...

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1. Treasury securities that mature in 7 years currently have an interest rate of 10.5%. Inflation is expected to be 5% each of the next three years and 6% each year after the third year. The maturity risk premium is estimated to be 0.2% (t 1), where t is equal to the maturity of the bond (i.e., the maturity risk premium of a one-year bond is zero). The real risk- free rate is assumed to be constant over time. What is the real risk-free rate of interest? 2. Assume that the expectations theory holds, and that liquidity and maturity risk premiums are zero. If the annual rate of interest on a 2-year Treasury bond is 11.8 percent and the rate on a 1-year Treasury bond is 13.3 percent, what rate of interest should you expect on a 1-year Treasury bond one year from now? 1. Treasury securities that mature in 7 years currently have an interest rate of 10.5%. Inflation is expected to be 5% each of the next three years and 6% each year after the third year. The maturity risk premium is estimated to be 0.2% (t 1), where t is equal to the maturity of the bond (i.e., the maturity risk premium of a one-year bond is zero). The real risk- free rate is assumed to be constant over time. What is the real risk-free rate of interest? 2. Assume that the expectations theory holds, and that liquidity and maturity risk premiums are zero. If the annual rate of interest on a 2-year Treasury bond is 11.8 percent and the rate on a 1-year Treasury bond is 13.3 percent, what rate of interest should you expect on a 1-year Treasury bond one year from now?