A corporate bond has a nominal interest rate of 12 percent. this bond is not liquid and requires a 2 percent liquidity premium (LP). The bond is of low quality and, thus, has a default risk premium (DRP) of 2.5 percent. The bond has a remaining life of twenty-five years, resulting in a maturity risk premium (MRP)of 1.5 percent.

a. Estimate the nominal interest rate on a Treasury bond.

b. What would be the inflation premium on the Treasury bond if investors required a real rate of interest of 2.5 percent?