Question
1. The real risk-free rate is 2%. Inflation is expected to be 2.4% for the next two years. Assume that the 2-year maturity risk premium
1. The real risk-free rate is 2%. Inflation is expected to be 2.4% for the next two years. Assume that the 2-year maturity risk premium is 0.3%, the default risk premium is 2.7% for BBB-rated corporate bonds and 1.3% for AA-rated corporate bonds, and the liquidity premium for large company bonds is 0.8%. What is the yield on 2-year Treasury securities? What is the yield on AA-rated corporate bonds issued by DuPont if they have 2 years to maturity? What is the yield on BBB-rated corporate bonds issued by Verizon which also have 2 years to maturity?
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