1. The real risk-free rate is 3.25%, inflation is expected to be 2.75% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, what is the equilibrium rate of return on a 1-year Treasury bond?*

a) 5.51%

b) 5.80%

c) 6.00%

d) 6.39%

e) None of the above

2. Kay Corporation's 5-year bonds yield 6.20% and 5-year T-bonds yield 5.0%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the default risk premium for Kay's bonds is DRP = 1.30% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) 0.3%, where t = number of years to maturity. What is the liquidity premium (LP) on Kay's bonds?*

a) 0.36%

b) 0.41%

c) 0.45%

d) 0.50%

e) None of the above