1. Suppose most investors expect the inflation rate to be 5% next year, 6% the following year, and7% thereafter. The real risk-free rate is 3.5%. The maturity risk premium is zero for bonds thatmature in 1 year or less, 0.3% for 2-year bonds, and then the MRP increases by 0.3% per yearthereafter for 20 years, after which it is stable. What is the interest rate on 1-year, 9-year, and

18-year Treasury bonds? Percentage answers should be rounded to 2 decimal places (0.12%)

while decimal answers are to be rounded to 4 decimal places (0.1234).

2. The real risk-free rate of interest is 4.5%. Inflation is expected to be 4% in the upcoming yearand 6% for each of the next 3 years. Assume that the maturity risk premium (MRP) is zero.

What is the yield on a 3-year Treasury security? What is the yield on a 4-year Treasury

security? Percentage answers should be rounded to 2 decimal places (0.12%) while decimal

answers are to be rounded to 4 decimal places (0.1234).

3. The real risk-free rate is 3.5%, and inflation is expected to be 4% for the next 3 years. A 3-yearTreasury security yields 8.1%. What is the maturity risk premium for the 3-year treasury

security?

4. A government bond that matures in 15 years has a yield of 7.8%. A 15-year corporate bond hasa yield of 11.3%. Assume that the liquidity premium on a corporate bond is 1.7%. What is thedefault risk premium on the corporate bond?

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