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10. Assume that the real interest rate is 2%, the default risk premium is 3%, the liquidity premium is 1%, and the maturity risk premium
10. Assume that the real interest rate is 2%, the default risk premium is 3%, the liquidity premium is 1%, and the maturity risk premium is 1% per year. Additionally, the expected inflation rate is 3% next year, 1% the year after, and 10% from then on. What are the nominal interest rates for:
a) 1-year note?
b) 5-year bond?
c) Does this produce an inverted yield curve? Why or why not?
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