5) Yield curves. Suppose the inflation rate is expected to be 7 percent next year, 5 percent the following year, and 3 percent thereafter. Assume that the real risk-free rate, r*, will remain at 2 percent and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2 percent for 1-year securities. Furthermore, maturity risk premiums increase 0.2 percent for each year to maturity, up to a limit of 1.0 percent on 5-year or longer-term T-bonds. a) Calculate the interest rate on 1-, 2-, 3-, 4-, 5-, 10-, and 20-year Treasury securities, and plot the yield curve. b) Now suppose Exxon Mobil, an AAA-rated company, had bonds with the same maturities as the Treasury bonds. As an approximation, plot an Exxon Mobil yield curve on the same graph with the Treasury bond yield curve. (Hint: Think about the default risk premium on ExxonMobil's long-term versus its short-term bonds.) Page 1 of 2 Strictly for course AB1201 internal circulation only. c) Now plot the approximate yield curve of Exelon Corp., a risky nuclear utility.