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1 . Keys Corporation's 5 - year bonds yield 6 . 5 0 % , and 5 - year T - bonds yield 4 .

1.Keys Corporation's 5-year bonds yield 6.50%, and 5-year T-bonds yield 4.40%. The real risk-free rate is r*=2.5%, the liquidity premium for Keys' bonds is LP =0.5% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP =(t 1)*0.1%, where t = number of years to maturity. Answer the following questions:
(1) What is the inflation premium (IP) for 5-year bonds? (1.25 points)
(2) What is the default risk premium (DRP) on Keys' bonds? (1.25 points)
2. For each selected day, compare the nominal and real yields at the following 5 maturities: 5 years, 7 years, 10 years, 20 years, and 30 years.
A. Based on the formula rnominal = rreal + i, calculate the rates of inflation on these five days at the abovementioned maturities. (1.25 points)
Note: Only the abovementioned maturities are considered for real yield curves.
B. Draw the daily inflation rate curves (five curves) on a scatter plot. (1.25 points)

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