6-8 EXPECTATIONS THEORY Interest rates on 4-year Treasury securities are currently 7%, while 6-year Treasury securities yield 7 5%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now? Calculate the yield using a geometric average.

6-9 EXPECTED INTEREST RATE The real risk-free rate is 3%. Inflation is expected to be 3% this year, 4% next year, and 3 5% thereafter. The maturity risk premium is estimated to be 0.05x (t-1), where t = number of years to maturity. What is the yield on a 7-year Treasury note?

6-10 INFLATION Due to a recession, expected inflation this year is only 3%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3%. Assume that the expectations theory holds and the real risk-free rate (r*) is 2%. If the yield on 3-year Treasury bonds equals the 1-year yield plus 2%, what inflation rate is expected after Year 1?

6-11 DEFAULT RISK PREMIUM A companys 5-year bonds are yielding 7 75% per year. Treasury bonds with the same maturity are yielding 5 2% per year, and the real risk-free rate (r*) is 2 3%. The average inflation premium is 2 5%; and the maturity risk premium is estimated to be 0 1 t 1 %, where t = number of years to maturity. If the liquidity premium is 1%, what is the default risk premium on the corporate bonds?