1. An investor in Treasury securities expects inflation to be 2.4% in Year 1, 3.2% in Year 2, and 4.35% each year thereafter. Assume that the real risk-free rate is 2.15% and that this rate will remain constant. Three-year Treasury securities yield 5.40%, while 5-year Treasury securities yield 7.00%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is MRP₅ - MRP₃? Do not round intermediate calculations. Round your answer to two decimal places.

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2. A 5-year Treasury bond has a 4.0% yield. A 10-year Treasury bond yields 6.2%, and a 10-year corporate bond yields 9.4%. The market expects that inflation will average 2.5% over the next 10 years (IP₁₀ = 2.5%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP = LP = 0.) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described. What is the yield on this 5-year corporate bond? Round your answer to one decimal place.

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