1- Which fluctuate more - long-term or short-term interest rates? Why?

2- Real Risk-free rate: You read in the Wall Street Journal that 30-day T-bills are currently yielding 5.5%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:

• Inflation premium = 3.25%
• Liquidity premium = 0.6%
• Maturity risk premium = 1.8%
• Default risk premium = 2.15%

On the basis of these data, what is the real risk-free rate of return?

3- Expected Interest Rate: The real risk-free rate is 3%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities?

4- Maturity Risk Premium: The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.2%. What is the maturity risk premium for the 2-year security?