1. A company's 5-year bonds are yielding 7% per year. Treasury bonds with the same maturity are yielding 5.2% per year, and the real risk-free rate (r*) is 2.75%. The average inflation premium is 2.05%; and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = the number of years to maturity. If the liquidity premium is 0.7%, what is the default risk premium on the corporate bonds?

2. Assume that the real risk-free rate is 2% and that the maturity risk premium is zero. If a 1-year treasury bond yield is 5% and a 2-year treasury bond yield is 7%, what is the 1-year interest rate that is expected for year 2? Calculate this yield using a geometric average. What inflation rate is expected during year 2? Comment on WHY the average interest rate during the 2-year period differs from the 1-year interest rate expected for year 2.