6.4 The real risk-free rate is 2.50%. Inflation is expected to be 2.50% this year and 4.50% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities? Use arithmetic average. 6.6 MATURITY RISK PREMIUM The real risk-free rate is 3.00% and inflation is expected to be 2.50% for the next 2 years. A 2-year Treasury security yields 5.55%. What is the maturity risk premium for the 2-year security? 6.8 DEFAULT RISK PREMIUM The real risk-free rate, r*, is 1.5%. Inflation is expected to average 1.5% a year for the next 4 years, after which time inflation is expected to average 5.0% a year. Assume that there is no maturity risk premium. An 11-year corporate bond has a yield of 8.7%, which includes a liquidity premium of 0.2%. What is its default risk premium? Use arithmetic average for inflation. 6.9 EXPECTATIONS THEORY AND INFLATION Suppose 2-year Treasury bonds yield 5.00%, while 1- year bonds yield 3.0%. is 1%, and the maturity risk premium is zero. Using the expectations theory, what is the yield on a 1-year bond, 1 year from now? Calculate the yield using a geometric average