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1.) Suppose 10 Year T-Bonds have a yield of 5.30% and 10 Year corporate bonds yield 6.75%. Also, corporate bonds have a 0.25% liquidity premium

1.) Suppose 10 Year T-Bonds have a yield of 5.30% and 10 Year corporate bonds yield 6.75%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-Bonds, and the maturity risk premium on both Treasury and corporate bonds is 1.15%. What is the default risk premium on corporate bonds? 2.) Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.50%, a maturity premium of 0.20% per year to maturity applies (ie. MRP = .2% X T where T is the number of years to maturity). Suppose also that a liquidity premium of 0.50% and a default risk premium of 1.35% applies to A-rated corporate bonds. What is the difference in the yields on a 5 year A rated corporate bond and a 10 year Treasury bond? 3.) If the yield curve is "normally" sloped, how would you describe what it looks like? What does this shape generally imply about future inflation expectations? 4.) What is the Federal Reserve currently doing to combat inflation? Describe how inflation could be reduced by these actions.

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