The real rate of interest has been estimated to be 3 percent, and the expected longterm annual inflation rate is 7 percent.

a. What is the current risk-free rate of return on 1-year Treasury bonds?

b. If the yield on 10-year U.S. Treasury bonds is 12 percent, what is the maturity risk premium between a 10-year bond and a 1-year bond?

c. If American Airlines bonds, scheduled to mature in 10 years, currently sell to yield 13 percent, what is the default risk premium on these bonds?

d. If investors in the common stock of American Airlines require a 16 percent rate of return, what is the seniority risk premium on American’s common stock?

INTERMEDIATE