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2) The risk free rate of interest is 3.0%. Inflation is expected to be 3.0% this year, 2.8% next year 2.5% the following year

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2) The risk free rate of interest is 3.0%. Inflation is expected to be 3.0% this year, 2.8% next year 2.5% the following year and 2.3% in each of the following years. Assume the liquidity premium is fixed at 1.25%; maturity risk premium is calculated to be .1% x (t-1); and default risk premium is fixed at 1.5% for years 1-5 and 2.2% for years 6-20. Be careful of decimals! Some of the premiums are less than 1%. Calculate the rate for the following: a) A 5 year bond. b) A 15 year bond.

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