2 years 4 years b. Finding the yield for each of the two investments Real risk-free rate 4% Expected inflation 2% for the next Expected inflation 3% for the following Expected inflation thereafter 4% Maturity risk premium = 0.03% *(t - 1) Liquidity premium 0.3% Maturity of treasury bond Maturity of corporate bond Corporate bond rating AA 12 years 7 years 12-year Treasury Bond Real risk-free rate Inflation premium Maturity risk premium 12-year Treasury yield Formulas #N/A #N/A #N/A #N/A Rating AAA AA A DRP + LP 0.10% 0.46% 0.80% 7-year Corporate Bond Real risk-free rate Inflation premium Maturity risk premium Liquidity premium Default risk premium 7-year corporate yield #N/A #N/A #N/A #N/A #N/A #N/A