1) You are given the following information:

r^* = 1.5%

Investors expect inflation to average 3% per year into the foreseeable future

The MRP on 20 year bonds = 2%

The LP on U.S. and Yubaba Inc. bonds = 0

The interest rate on a 20 year loan to Yubaba Inc. is 1.25 times the rate on a 20 year loan to the U.S. government

a) What is the interest rate on a 1 year loan to the U.S. government?

b) What is the interest rate on a 20 year loan to the U.S. government?